Investments - an analogy to household affairs / Shivam

The other day, while surfing the internet randomly, my eyes caught hold of a quote from Benjamin Graham, the mentor, and teacher of legendary investor, Warren Buffett. Graham says, "the investor's chief problem - and his worst enemy - is likely to be himself. In the end, how your investments behave is much less important than how you behave."  

His words gave me a feeling of clutching at the last straw while drowning. Let me explain. I have been getting several calls from a number of depositors/ investors asking for advice regarding their deposits/investments in a market that appears to have changed due to COVID 19. The callers were people from different professions— right from homemakers to civil servants, technocrats, businessmen, finance professionals, and even seasoned bankers. To my utter surprise, some of my callers were so-called financial advisors, whose very job happens to be advising common people about investments. Even more shocking was their confession that they are not able to muster enough courage to take calls of the investors they used to advise. These people were not laymen but were professionally qualified to offer financial advices and yet, just at the first blow of a crisis were dashed. Anyway that’s not the point I am going to make today. We shall come back to this some other day and here shall focus here on what an investor can do to safeguard their investments.

To reply to the queries mentioned in the preceding paragraph, I was was lookout for something which could be explained to and should be comprehensible to everybody notwithstanding his profession and knowledge level. And finally, I got Benjamin Graham's recipe, "how your investments behave is much less important than how you behave." It may be impracticable to understand minutely how investments behave but everyone can understand and to some extent control how they behave. And this is the issue of discussion today.

The very first thing to be understood is that "my money is my responsibility and that all kinds of sellers, be it bankers; brokers, IFAs or agents have a sense of greater allegiance to their own money and their own organisation. Let us know well the dichotomy between "owning money" and "owning responsibility for money". Understanding this difference, and owning the responsibility (for our money) is the FIRST step towards managing how we behave.

Now, let's ask a question to ourselves - why would a seller or advisor of financial products would toil up for us? The answer, of course, is to earn money. So, when we ask our advisors/ sellers to give us a cut from their commission, we become downright unfair. It makes us a bit like Shylock asking for a "pound of flesh". This might lead to the illegal practice of rebating and its natural outcome is indiscriminate selling and often mis-selling. And this selling or mis-selling is completely devoid of advising elements. If one wants the services of an advisor, one must be ready to pay the fee. The SECOND thing to do is to imbibe in our behaviour the concept/ principle of *'TINSTAAFL' (There is no such thing as a free lunch).* If anyone does provide free services, we must be skeptical and more so, if free service is sugar-coated in the form of freebies. Now, if your advisor has stopped taking your calls or has started avoiding you, it is time to forget him/ her and take charge of your money yourself.

Watching our own behaviour as well as that of our kith and kin can act as a wonderful guide to the 'investor' present in us. Try it! Give your kid something new to eat and watch his skeptic countenance supported with heavy shelling of queries that match exactly to all of those when someone approaches you with a new investment product. The kid sniffs and asks- what is this? Why not A, B or C or one of his favourites? Exactly in the same fashion, give a skeptical look to the seller of financial products and ask, "what's this? Why not those?"  Name a few products even if you don't know much about them and ask how the current product is better suited for you? This kidlike behaviour would be enough to differentiate between an amateur and a professional one. And you can get a sense as the advisor who  withstands your skepticism and inquisitive behaviour while also trying to provide answers to your questions is really a professional buff. This kidlike behaviour is the THIRD behavioral trait* for a successful investor.

Now, grow from kidhood and watch how a homemaker buys grocery items. Have a patience like her. In a vegetables mandi the first thing she does is to take a glance over the whole area consisting of approximately half a square kilometre to get an inkling of the general availability of items and their general price level. Then a suitable shop is chosen that susits to her taste and confidence level. Then starts the real deal. Each piece of potato, onion, tomato etcetera.. etcetera is inspected carefully from all sides, is pressed to measure its ripening stage; sniffed if required. If it passes through all the above quality testing, the bargain begins and the deal is struck at the most competitive price. Once back home, you can hear her say that she could have gotten a better deal, only if she had tried more shops or bargained more. Even after all these precautions if something appears to be inferior, she immediately rushes to exchange or return as the case may be. I often wonder if  Warren Buffett discovered the golden rule of investing while in a grocery shop with Mrs. Buffett, which he later paraphrased as "investors should evaluate stocks not as if they were buying perfume but as if they were buying vegetables". This explains the FOURTH behavioral trait of an investor—  hunt for a good bargain.

Demonetization unearthed a considerable amount of currency notes in denominations of ₹500 & ₹1000 from thither to unknown pockets of homemakers. Maintaining such an unknown pocket is the FIFTH behavioral trait of an investor. One should keep adequate provisions in liquid form for unforeseen events before allocating an amount for investment. Investing without ensuring adequate liquidity for any unforeseen need may put the investor in a precarious situation and subsequently lead to an abnormal loss.  Occasionally,  unplanned investments result in speculative but intoxicating gains that eventually lead to more loss than one could bear easily. Both, initial gain and initial loss in investment, flip our gambling instincts, and can destroy our financial well being. Be careful of both and don't get carried away by either of them. That's the 6th behavioral trait of an investor—practice restraint, especially in the face of initial loss or gain.

It is often said that investment is a long term affair but there is hardly any clarity over what is the ideal duration of the long term? I too have been trying to get an answer to this question. For quite some time, I have been groping around different finance and investment books to find the definition of 'long term' but couldn't find any except that the duology of 'long term' and 'short term' in the context of taxation. Finally, I was able to find some guidance in Warren Buffet's wisdom, whose favourite holding period is forever.  Warren's investment strategy reminds me of an incident from my childhood. Once, while coming back from mandi, my grandfather brought a mango sapling and asked me to come to the orchard. I happily followed him. Then started the process of sowing the sapling. As the chores moved  ahead so did my numerous queries - how long would it take? how many mangoes will grow? how sweet would they be?. I did not remember what my grandfather answered. The answer was none of my concern. Every morning I would go to see the sapling and come back disappointed that there were no mangoes. My grandfather noticed my impatience and on one fine day he explained to me that there was no magic! It would take a minimum of four to five years before I would be able to taste the fruits. Till then I needed to take adequate care, like watering the plant, saving it from animals etc. He also said, if properly nurtured this mango tree would become a lifetime asset and will even benefit future generations. I don't remember how well I understood the message then, but today while trying to understand the long term, my grandfather’s long-forgotten words seem to be more relevant.

My grandfather’s perspective on investment is diametrically opposite to how we behave as investors. More often than not, we start expecting returns from the very next day of investment. Till all of us find someone like the grandfather who appreciates our impatience and explains to us the concepts of investment, let's take a cue from Warren Buffett's 'favorite holding period' i.e. 'forever'. This explains the SEVENTH behavioral trait of an investor— be patient with returns and ready to invest forever.

If we understand and can control these seven behaviour traits, then we can take care of what Benjamin Graham describes as the more important requirement of investor success - how you behave? We will reserve some other day for discussing how your investments behave - the less important requirement in Graham's prescription.

...........

(Author - Shivam, MBA, FMS Delhli) 

The author is a Sr. VP at SBI Mutual Fund, Corporate Office, Mumbai. Respond to him at shivam.kumar@sbimf.com . You may also send your feedback to the editor at hemantdas2001@gmail.com