Wednesday, 16 September 2020

Science behind the Bad Investment… Part I


While the numbers and the statistics play an important role in any financial investing, finally it’s the human beings who are doing the actual execution! Human psychology is an interesting science, but at the same time it’s a dangerous thing. Many of the investors and even advisors are not aware about the common psychological behaviors that can wreak havoc on your hard-earned money invested into different instruments. (In fact, a few investment advisors use this knowledge to their advantage by getting people to invest in not ethically correct decisions but rather more convenient ones for themselves.) How dangerous it could turn out to be for the financial future of you and your families… Just Imagine!!

So today, our attempt is to educate you and share some important pointers on science behind the investments and most essentially how to avoid the bad investments. So here we go. The first part of this blog is going to talk about few basic concepts and biases.

Let’s start with the most common one and what people think is the best decision in the circumstances. The “Loss Antipathy Bias”!  People believe that there are more bad things in the world for us than the good things happening and thus it’s better to capitalize on anything positive at any given point in time. Simple example is of investment that you have done in a couple of funds at the same time. One was say: 1 Lac because of a “hot tip” given by your friends and another one was a 15000 only in an investment which was well researched by you. Imagine the 1Lac has gone down to 50000 only whereas a well-researched one you did is now 50000 too. Which one are you likely to sell in a need? “The Loss Aversion” mindset kicks in and says, sell the profitable one first, else you may lose that one too!  It’s the natural psychological barrier which says you may lose this profit.  

Well, we all should see that it’s not a simple answer! That profitable 50000 may be only just tip of the iceberg and the rally is expected to take it to 1Lac… But, psychology doesn’t let you think like that.

A wonderful analogy is shared in one of our earlier blogs with a story of Tamarind Tree.  (Link: Why an Investor should never let a crisis go waste) The tree which was feasted upon regularly and daily without letting it grow, dies soon after. And the one where you let it flourish will continue to give prosperous returns.

On similar lines, we can think of another pitfall called “Lost Cost” pitfall. This is as dangerous as the previous one we talked about, if not more. Psychologically, we start protecting and justifying certain decisions taken earlier (but not realistically), and its catastrophic for the investment. It’s very difficult to accept that you made a mistake or made a wrong choice of investment earlier! You continue to stay vested into this loss making instrument, even though the best idea would be to get out of it as soon as possible. This delay can prove to be fatal for any positive returns. Emotional commitment to the bad investment makes things worse.

An ideal analogy here can come from Mahabharata and the character “Karn”. He is actually the son of Kunti, Pandava’s mother. He knows that he has sided with the wrong side during the war and Duryodhana is the side of “Adharma”; but unfortunately to keep his commitment to Duryodhana, was killed in the war along with other Kauravas.

Next one to talk about is a “Relativity and Comparison” pitfall. Each and every individual is different psychologically. Each and every situation is different worldly. And each and every opportunity looks different from an individual’s goggle or a lens. This is a true reality! Not every investment and opportunity can be compared and related to what others are doing. Especially, your closest friends and relatives… Imagine there is a huge opportunity in the market because of a certain global situation, whereas your best friend wants to put in additional 50Lacs investment to benefit from this opportunity, you may not be in a position to do same thing! Multiple factors to be considered like family responsibilities, financial liabilities, ongoing commitment to certain investments already done (e.g. property loans or some electronic White Goods purchased on EMI plan). Well, these are still simple but how about your mental or psychological make-up??!! Every individual is different and so is the risk-taking or risk-aversion ability. If investing these 50Lacs is going to lose you a good night’s sleep, is it really worth it??!!

But people do get into this, comparison and relativity trap and thus losing a lot on investments in future (if they don’t stay invested) or even on their comfort and mental well-being.

The analogy here can be of a copycat syndrome in business scenarios. What the market leaders do, some businesses blindly copy. They may not have the sustainability say in terms of marketing dollars spend and thus eventually lose out on the entire business.

Irrational Exuberance Pitfall (Term popularized by US Fed Chairman Alan Greenspan): So, what does it mean? Irrational exuberance is unsupported and unfounded market optimism that lacks a real foundation of fundamentals, but instead rests on psychological factors such as past performance. When investors start believing that the past equals the future, they are acting as if there is no uncertainty in the market and market will only continue to go up. Unfortunately, in real world the uncertainty never vanishes. Just relate it to the COVID19 scare we have been living through for past 6 months. It was never expected and is a kind of Black Swan event that has crippled economies all over the world. Irrational exuberance is actually synonymous with the creation of inflated asset prices associated with bubbles based out of just sentiments and emotions, which ultimately pop out.

Well, the stories and examples are galore and we can learn from many of those… But, these are only a few pitfalls being talked about. In the second part of this blog let’s talk about few other psychological barriers. Are you ready?

Monday, 24 August 2020

Creating a legacy, shouldn’t be messy!!


“Make a difference, change the game for the better, leave a legacy, be a guide that someone else can follow and make better, and then someone else will follow that and make that better.”

― Carlos Wallace

A beautiful quote that forms the basis of our today’s topic and something that will serve as a guide for the families, head of the families and the society as a whole who leave back their legacies. The unclear, undecided, unattended and unprepared plans for continuing the family inheritance is bound to play a spoilsport when everything is said and done. So, lets discuss more about the why, the how and the when of Creating Legacy for your successors.

Typically, the legacy or inheritance (in case of India) is thought about only the materialistic things: such as the bank balance, real estate, the business ventures, family ornaments and anything else that is considered precious and valuable. And that in a way is correct too. But, it is imperative to pay attention not just to the semantics of the word Legacy but rather it’s much deeper and comprehensive implementation of it in the real world. This means passing along the knowledge of values and the character.

Still unclear??!! Let’s talk about a wonderful example here… I am going to talk about Mahabharata, the epic and the classic that was written down almost 3000 years ago. We all know and remember the things from Mahabharata that there was a war between Kauravas and the Pandavas that continued for almost 18 days and eventually the Pandavas won. But, have we ever thought about “the Why” of that war??!! The roots of this war were not just the intentions of becoming the King of Hastinapur (between the Kauravas and the Pandavas); but it ran much deeper than that. Their fathers Pandu and Dhrutarashtra, their uncle Bheeshma had passed along to them the Throne of Great Hastinapur Kingdom, but along with that the set of values and beliefs to the Pandavas and Kauravas clan too. Earlier in the years, Kaurava’s father Dhritarashtra being blind was sidelined by the elders and they made Pandu (Pandava’s father) the King of Hastinapur. Dhritarashtra from that moment onwards was emotionally hurt and very prejudiced and felt as if injustice was done with him. Later, as Pandu passed away, Dhritarashtra became the King and always wanted his sons to take up the throne next. He wanted the history not to repeat itself… Just imagine, what was left in inheritance was not just the throne but the acerbic values, behaviours and thoughts as well. Naturally, there was a power struggle for the Throne and with multiple ethically and morally wrong-doings such as attempt to de-clad Draupadi in front of the entire raj-sabha, killing of Abhimanyu and mutilating his body during war to name just a couple. The entire Kaurava clan was killed and Pandavas next generation was wiped out by Ashwatthama after the war…  Was the war really worth all that??? It was not just legacy of the throne but the wrong values and ethical conflicts passed along…

Now, why are we talking about this entire story in the modern generation? The reason is exactly what we have been exploring and obviously for the analogical reasons… The legacy means not just the valuables, real estate and the money, but passing along the knowledge to earn, to retain and to grow the financial independence. The earlier generation has really worked hard for it and so the next generation should not just take it for granted. Otherwise, in modern day context: the crores those have been earned over many hardworking and smart-working years, could simply be spent and flushed down the drain without much clarity of thought and absence of guiding principles. You don’t want your Legacy to be “What could have been” but rather become “What has been and will remain in future” too…

So, what can be done about it? How can it be done? The answer lies into financial planning tools and sound advise, as well as making sure your next generation stays on top of it too. They are to be made part of this planning too and they are to be made aware about the perils of lackadaisical attitude towards the money management. Let them understand it, let them earn it and then let them enjoy the fruits! Imagine an 18 year old getting a new BMW or a Mercedes car, without understanding the real value of it… Not price, but the value! It would be an irony to think that in your own lifetime you have to worry about your inheritance due to worrisome habits. So, then what can you do about it? There are more than few ways to plan it and prepare it. Here are a couple of thoughts and we definitely want to advise you to take professional help to decide what is best for you. Thinking of doing formal “Will” is a great way ensure that your legacy is secure. You can define and pre-decide certain clauses based on time, based on conditions and based on situations in there to protect your Legacy. A wonderful idea would be also to create a trust which will manage the funds as well as help your heirs decide on the correct course of action to preserve the wealth. Another suggestion could be to invest in an instrument like Whole Life Insurance and ensuring that your hard-work, rewards the next generation; no matter whenever your leave your earthly journey for heavenly abode… Just a few ideas to consider for preservation of your Legacy in cleanest possible way!!

Finally, we come full circle to our question… What does it mean to leave a legacy? It means putting a positive stamp on the future of your family, and making a contribution to your future generations. People want to leave a legacy because they want to feel that their life mattered. Let us at K M Wealth Solutions help you do that… Are you ready to leave a mark on the future to come?

Friday, 7 August 2020

Financial Planning - Does it really work for me? Part 2

In our earlier blogs, we were discussing about couple of very important concepts. The financial planning is about long term gains rather than short term returns. It’s about the plan and goals, it’s not about only impulsive investing. Financial planning is not about only investing but focusing on the big picture. Financial planning is also about using the expertise available (even at a certain cost) rather than focusing on individual knowledge that you have and that you are planning to gain from the friends and family. 

 Well, sometimes people do feel that they do not earn enough and they do believe that whatever smaller amounts they could save are just to be put in the savings account. They might think their financial planning would be very simple and straightforward. On the other hand, they might think that the rich people require the all this planning as they have a problem of plenty. They need advice on where, when and how to invest. Well, they are only partly correct.

 Commonly heard statement: The rich people and high income earners do have abundance and they would need advice on sound financial planning to invest their riches. Whereas the small earners cannot afford to even look at financial plan as they simply don’t have enough.

 Let’s look at it from a contrarian view. Though statement above makes logical sense, it would be unwise to think only like that, especially for the low income earners! Imagine you are getting a small income, but you have a family to feed, future responsibilities of theirs to tend to; as well as personal retirement savings that they should generate. Now, think who needs the plan more??!! While the high income earners would eventually end up having more money to spend on all the responsibilities and retirement, the low-income earners need sound advice and constant hand-holding to reach all their future saving and financial planning goals. Makes sense??!!

 Well, important point is even the high income earners, business people and top management professionals would need to look at their goals and planning. Have you heard about Mike Tyson, who earned more than 300 millions of dollars during his professional boxing career, but ended up being bankrupt soon after due to bad spending habits (he once spent 400 Thousand dollars on his birthday party) and not thinking about his future and retirement life. Do you wonder even with all this money made during the careers, how this no or little financial planning can break you badly… People who do not endorse meticulous fiscal planning should learn from this and many such stories. Aranxta Sanchez Vicario (14 times Grand Slam Winner in Tennis), Diago Maradona (World famous footballer), Marion Jones (3 times World Champion Sprinter) are just another few names who had to file for bankruptcy even after earning millions during their illustrious careers. With bad or no financial planning, you are simply trusting that everything will work out on its own.

Now, interestingly enough some business owners think that why should they even invest hard-earned money and profits into someone else’s business. Isn’t it most prudent to invest in one’s own business to grow your own business and reap all the benefits? No doubt this is a good thought and a practical one too. But, this means you are spreading too thin or you are actually putting all the eggs in one basket. It could become a very risky proposition, if something goes wrong. Even when businesspeople preach about diversification in their own business, and then why not think of diversifying your own investments into multiple instruments and work on a definite plan to achieve that??!! 

Haven’t we all heard the story of an Inattentive Deer?

One day, a deer is feeding on the coast. She is always worried that some hunter will come through the field and shoot her, so she feeds with her back to the sea so that she can keep an eye on the fields. However, while she is so focused on the fields, she doesn’t notice some fishermen come from the sea and throw their net over her. As she is captured, she exclaims: “ I wish only if I had anticipated this and not ignored the sea-side completely!”

There is no point putting the blinkers ON and think like the race-horse does. While the race-horse has a very short term and clear objective of winning that particular race, wouldn’t it be wise to think that we all are rather in a long haul and possibly need a wider vision and definite foresight into our financial future?  Sometimes, people get into a rut of a particular type of investment like gold investment or a real estate investment over and over, because it has yielded them results for an extended time span. But, it’s not practical to think that for your life-span that same thing is going to be the trend. It’s not feasible that the same instrument of investment will have absolutely no ups and downs, especially when you require money for some contingencies and emergencies. Thus, concrete financial plan and diversification in investments, through the expert’s advice should be top priority.

 Financial Planning is a must for the better future and better life. Now, doesn’t it sound appropriate?