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Charlie Munger is a huge fan of Lee Kuan Yew (LKY)the founder of Singapore.
Below are 5 learnings which Charlie Munger has graciously shared across forums
Sometimes you need to centralize power.
“It’s no accident that Singapore has a much better record, given where it started, than the United States. There, power was concentrated in one enormously talented person, Lee Kuan Yew, who was the Warren Buffett of Singapore.”
Figure out what works and do it
“If you want one mantra, it comes from Lee Kuan Yew. … Figure out what works and do it. You just go at life with that simple philosophy from your own national group, you’ll find it works wonderfully well. Figure out what works and do it”
Build Laws which might look crazy, but actually solve a unique problem
“Singapore was 70 per cent Chinese and 30 per cent, Malay. Every Chinese thinks that the Chinese are superior to the Malays. He thinks that’s terribly counterproductive if anybody should say so, so he passes a law. You can’t say that if you’re a Chinese in Singapore, you can say there is any superiority in the Chinese. I think that is a very sensible law for Singapore to have.”
Kill problems when they are at the seed stage for good.
“But I think Singapore’s habit of stepping hard on things that will grow like cancer is the correct way to govern. In America, we tend to wait until they are unfixable and we want to fix them. If you want to take a problem when it’s solvable and wait till it’s unfixable, you can argue you’re so damn foolish that you deserve the problem ”
Learn and copy from wherever it works.
“He’s got a drug problem. He searches the world over for the right solution to the drug problem. He finds it in the United States. Isn’t that a very interesting thing. Somebody in Singapore reading books and deciding the United States was the answer to Singapore problems. He copied the military’s drug problem policy. Anybody in Singapore would pee in a bottle instantly on-demand and if they flunked would immediately go on a tough compulsory rehab.”
And lastly the funny story from the below video.
Singapore needs aid, especially in the military. But geographically it is surrounded by countries where Muslims are the main religion. Considering the picky situation no country is willing to give military aid except one, Israel.
No person in the right frame of mind would take aid from Israel knowing that you are surrounded by countries who are anti- Israel.
So what does LKY do? He takes the aid but tells that it’s from Mexico :)))
More Interesting content
65-year old who started the Financial Revolution in India
The staple information which you will hear is that the stock market rose because foreign institutional investors put in more money or that the same investors by selling are taking out money from the market.
Nothing could be further away from the truth. Why?
Because whenever someone puts money in the market that is they buy stocks someone sells it. Therefore the net outflow is always zero. If you buy Rs. 100 Crs of share someone sells you shares worth exactly Rs. 100 Crs. Money Flow= ZERO.
What though matters and is far more important is at what price is any money will to enter. This perception which a buyer or seller has allows the price to go up or down.
In the above example itself if a stock is trading at Rs.1000 and a mutual fund wants to buy Rs. 100 Crs worth of it and thinks that till the stock reaches Rs. 1500 its cheap to buy. Then irrespective of the prices quoted by the seller they will keep buying to hit this allocation. That is what pushes the price up to and not the fact that they have put more money into the system.
Similarly, when someone is selling they have a perception is that if a stock goes above Rs. 1000 it’s expensive and they start selling.
The stock market is not a function of only money flow but its a function of view both sides of the table had.
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A STOCKBROKER, WHO AT 65 STARTED A FRANCHISE WHICH MOST INDIANS KNOW TODAY
The Original HDFCH T Parekh (HTP)
Hasmukh Thakordas Parekh was a Gujarati Jain who started his working life as a lecturer at St. Xavier’s College in Bombay. But, like most other folks from his community, he will soon get attracted to Equity Market. After three years of teaching others to make a better living, he began his financial career with one of the biggest brokers in Bombay in those times, Harkisandass Lukhmidass. This is where he will draft his first proposal for a housing finance company for them in 1951. In 1953 he brought out a volume called: The Bombay Money Market which detailed the intricate working of the Indian money market. But, then he will leave India for his studies at the London School of Economics(LSE).
Post that, on his arrival, he will join the Industrial Credit and Investment Corporation of India (ICICI) and was its Chairman (1972) till his retirement. At the same time, he will argue for public-private partnerships in financial institutions and will again push for affordable financial support for basic needs such as housing. Alongside he was also the key member of Sameeksha Trust, that was running the Economic Weekly magazine (today’s EPW)
He was the advisor to the LIC during the Haridas Mundhra scandal and knew the financial markets inside out. During the Harshad Mehta Scam, he plays a key role in pushing Stanchart Chartered to file an FIR against Bhupen Dalal.
Pioneer in Housing Finance
At ICICI he made another proposal for a housing finance company – this time, for Bank of Baroda to set up a subsidiary for housing finance-and sent it for the finance ministry’s consideration in 1973. But, no one was interested.
He retired from ICICI in December 1975, at the age of 65. Now, he started focusing on his dream project of Housing Finance in India. By March 1977, the Janata government had replaced the Congress government. Parekh went to New Delhi to meet H.M. Patel, then Finance Minister. He told Mr. Patel about his plan and also said that he had come to him not for any financial help but for the new government’s support, in principle. Patel told Parekh, ‘What are you waiting for, go ahead, it is an excellent idea”. Housing Development Finance Corporation Limited (HDFC) was registered as a company on October 17 and H.M.
The Board of Directors of ICICI had agreed to back the project by taking up ₹50 lakhs of equity, i.e. 5% of the proposed capital. Mukhtar Munjee will convince Aga Khan to be their investor. He will also ask his son Nasser Munjee to join this budding institution as the first set of employees.
HTP formally launched HDFC on October 22, 1977, (Dussehra day) in Bombay, with Mr Patel as the Chief Guest and with an initial capital of 10 crores.
Deepak Parekh
In May 1978, HDFC will have their public issues. Within a year, HTP called upon his nephew who was then in his late thirties and was working with Chase Manhattan Bank in Saudi Arabia. told his nephew: ‘We are doing something new, why don’t you join us instead of running all over the world?’ Deepak joined as the Deputy General Manager in November 1978. When Deepak Parekh joined HDFC, he had to take a 50 percent salary cut.
But Banking was in his blood, Central Bank of India would hire Deepak’s grandfather as their first employee. His father, too, was an employee of the Central Bank of India and retired as its deputy managing director.
The other Deepak
Deepak Satwalekar, a B.Tech from IIT Bombay will join in 1981. He came from a family of artists. His grandfather was a famous painter and his father, Madhav Satwalekar was the Director of Art, Government of Maharashtra for many years. Madhavji painted H.T. Parekh’s portrait that hangs today at the Indian Merchants’ Chamber.
HDFC-Powerhouse in Making
For years, HDFC relied on wholesale money that came from international agencies to fund its retail loans. It had no competition. Till the late 1980s, it governed 100 % of the housing loan business.
HDFC floated two more ventures in 1986-87. Gujarat Rural Housing Finance Corporation (GRUH), set up jointly with IFC, Washington, and the Aga Khan, will operate only in Gujarat, for acquisition or upgrading of residential loans in small towns and rural areas.
By 1987, their disbursements reached Rs 175.52 crore, registering increases of 20 % (yes the same 20%, with which we all associate HDFC Bank today). Within a year they started doing a few new innovations in the Indian market.
Three new products launched during the earlier years, the Step-Up Repayment Facility (SURF), Telescopic Loans (TLP), and Short Term Bridging Loans (STBL).
SURF offers an option where the repayment schedule is linked to the expected growth in your income. Soon it accounted for a 21% share of total loan approvals during the following year.
HDFC has been like its sister concern HDFC bank phenomenal wealth creator.
Frauds are fascinating, almost like work of art. Why?
Every time they happen ( and do they happen often) you think that how the hell was this missed.
But therein lies the beauty or art of the fraud. The promoters or companies use the same playbook but make it look very different than older ones. A combination of financial engineering and money management are tools used to execute this art.
The root of every fraud stems from either greed for money or desire for power or a combination of both.
And interestingly, they both arise from success. We don’t know of any company which was unsuccessful from the start and was also a fraud.
Ergo, as a CEO, Promoter, Founder any moderate success ensures that both greed and power are available to you in reasonable doses.
This is the trickiest part, top management needs both these to keep the company forging ahead but over-indexing on any of them means they have set the company on a slippery path.
Let us take a few cases from the previous decade. We choose older cases so that you can see that patterns remain the same for newer frauds also.
Take the case of Satyam.
When Ramalingam Raju started everything initially was going great. But then the greed of market cap came in and the power of owning an empire came in. To hit them Satyam starts to give far more aggressive guidance to investors, who lapped them up to push the stock prices up and they flywheel continued to move. To satisfy the urge of power Maytas, an infra company was created ( infra was super hot at that time). A fair bit of Financial Engineering and funds from Satyam started to move into Maytas and that engine also got its fuel.
Eventually, we know what happened. The lies of higher guidance's led to fake revenues to fake cash and so on
Take the case of Moser Baer.
Moser Baer started very well. They were trying to make a brand play in a commodity business of CD’s. After initial success instead of realizing that Chinese competition was going to make this really hard, they started getting greed. The numbers would show Moser Baer a fast-growing, high-tech, export-oriented company having huge margins and 10% of the global market of its products in early 2000.
Moser Baer claimed to have a 10% share of the global market. Its two key competitors Ritek and CMC Magnetics (both of Taiwan) at that time supplied nearly 50% of the world’s recordable, compact discs (CD-Rs). Their gross margins were under 20% in 2001.
However, they realized after some time that this was not working but instead of cutting out their greed they moved to start a new business.
As oil prices have been high since 2007, Moser cooked up the idea of getting into solar power. The lure of power and money combined here eventually leading to the bankruptcy of both the companies.
Translating this greed and power to more palatable motives leads to cited motives like: meet earnings expectations; conceal the company’s deteriorating financial condition; bolster performance for pending equity or debt financing, or to increase management compensation.
From this lens what are the few things which you can look for to get your fraud signal alerted
When a company tells a story which usually is too good to be true, it usually is too good to be true. Greed and Power often combine to drive this narrative.
A sudden increase in PR/ Media Appearances— > While the PR appearances do tend to make the brand more recognizable, but usually they are part of a bigger narrative. Great companies typically don’t need PR for CEO’s as the consumers do that work for them.
A great business suddenly diversifies into a very hot area. The story usually told is that we are great executors of X and therefore will be able to execute the Y
A company is showing great results when the whole sector is screwed. This is often much harder to execute than its shown. Divergence from the performance of other companies may not necessarily be due to the ability of the company.
Then there are a lot of smaller indicators like low delivery to volume ratio, consistent price rise with huge volumes which the share has never seen.
Even with tools like above Detecting fraud is fascinating as you need to use the data and news to figure out if the company is on the path of greed and power. That is much lesser science but much more art.
Its 2015, November and Barcelona are playing against their arch-rivals Real Madrid at their home ground, Bernabeu. At around 9 minutes into the game Ronaldo, the super striker of Real Madrid marches towards Barca goal but is foiled. The ball then lands to XX who then starts a classic t0tki-taka move of passes. They keep passing to each other for 38 times and then it happens. The Madrid defence becomes a little lazy a small gap is opened in which lands the 39th pass. The next pass goes to Suarez who puts in back of the goal.
https://youtu.be/OzKLcPo43Gc
Tiki- take the rule of Investing
FC Barcelona’s philosophy is simple if the opponent doesn’t have the ball they can’t score. So they keep the possession and wait and wait for the right opportunity to attack. Similarly, when they lose the ball they work double hard to get the ball back in their possession
One needs to wait patiently for the right moment to attack the market quickly and decisively. In case you make an error in sports or investing, you need to rectify it at double speed to regain control of your investing field.
Let us look at another classic sports moment, this time we go to Motor Sports. Valentino Rossi and Lorenzo are locked in a neck to neck race at Cataluyna circuit. With just 3 laps to Rossi makes the move and takes the lead. But as they cross the start-finish line, Lorenzo dashes out and goes ahead only to see Rossi make the most audacious use of breaks on the left-hand side on straight to move ahead. They battled more but Rossi took the lead again at the final turn to win the race.
https://youtu.be/LSR--QF9dWk.
The braking rule of investing.
What separated Rossi from a lot of others was that while all of them were very good in accelerating bikes Rossi was superhuman in decelerating and braking his bike. When markets are going up and your portfolio is growing up you tend to think that this won’t end and actually the acceleration will happen faster. It as at these times you need to break decisively by cutting down your equity exposure and moving them to other asset classes. The next rule comes from the world of cricket2003, India is playing Australia at Adelaide. The series has been bitterly fought and Australia batting first has scored 556. India in reply is struggling at 85/4 when Rahul Dravid takes charge. He shows a masterly calibration of defence and attack and goes on to score 233 allowing India to fight for a victory, which they do to notch up a famous win.
https://youtu.be/qxmah1V3cgM
The defence rule of investing.
As Warren buffet says the most important rule in investing is not to lose money or not to lose so much that you can never come back. What that translates for all of us is that investing only when you are protected against permanent losses of capital. That would often mean leaving a lot of balls and chances and waiting for the right ones to come. This applies to both sports and investing.
Sports brings out the raw human traits and those excel in sports are ones who are able to master control over these traits. Also, it is the best way to learn taking losses on the chin and to look ahead. And this is exactly what you need to do if you need to succeed in both sports or investing.
Additional Reading you may enjoy
5 Laws for Financial Planning which are not from Finance
The right way to do Financial Planning in 2 minutes
How does financial planning happen today?
The typical process of financial planning involves the following steps.
Identifying your risk type and thus the ability to take Risk
What are your long term goals usually more than five years into future
Basis the above you get a plan asking you to invest in various products at various times
But it doesn’t work!!
While there are tons and tons of tools and financial advisors, none of it usually works cause of the fact that our risks keep changing. Our goals are not steady or fixed, and finally, new products keep coming up.
Let’s look at Risk first:
Suppose two people have seen the 2008 crisis. One of them lost his job and took a massive hit on his investments. The other girl was able to retain her job and then invest also at those rock bottom prices.
Fast Forward now: Both of them are working and doing well, have similar salaries and similar lifestyles. All tools will tell you that their risk-taking ability is of the same type. However, that 2008 event changed everything which no advisor or a tool can detect.
Next lets at goals:
Long-term goals are hard to implement because they are a collection of short term goals. These have to be managed, marketed, and used as information to gauge whether a long-goal reward still exists.
What this implies that long term goals look great on spreadsheets, but what matters is managing the short term goals consistently to make the long term goals happen.
Long term thinking will say keep investing for ten years without telling that in between you would be asked to invest even when your portfolio is down 50%.
As you can see its almost impossible to have a stable financial plan when all the components underlying the idea keep moving
Financial Plans are inherently unstable
The emergence of Financial Pornography!!
Coined by Nick Maggiulli, it tells that how financial apps and advisors use beautiful looking charts, engaging tools, quizzes to portray a future that seems highly achievable. Unfortunately, they usually have no resemblance to reality. Like in our post on goals we looked that the same
Looking at these tools and charts will make you think you are doing well only to release that goal don’t move that linearly and bad things happen
The Financial Turing test
We borrow this concept from the Blog https://ofdollarsanddata.com/the-financial-turing-test/
Imagine you meet someone new or use an app that claims to be a “financial expert.”
If you could only ask them one question to determine if they are legit, what would you ask? We call this the Financial Turing Test.
The original Turing Test was a thought experiment designed to determine whether artificial intelligence (AI) had been invented. The idea was simple. You sit down at a computer terminal where you message back and forth with some “entity” (either a human or a computer program, but you don’t know which).
Assuming you can ask any questions you want, could you determine whether the entity you were chatting with was a human or a computer more than 50% of the time? If you can tell the difference, then AI doesn’t exist. Otherwise, the Turing Test has been passed, and AI exists.
Instead of identifying whether an entity is a computer or a human, the Financial Turing Test differentiates financial sages from financial charlatans.
So what is the Turning test question for alls such tools and advisors?
Ask if the tool/advisor helps you answer this question.
How do you get rich without getting lucky?
If they tell you to invest in goals or ask you to save here you know well they are failing the test. Cause they are implicitly telling you that the three components of financial planning Risk, Goals, and Product all have no luck involved. That is so far away from the truth
The 2-minute Financial Planning checklist
So yes we have criticized everything till this point. How do we then address this?
We do it in a straight forward manner.
All your financial decisions have to do two things
1) Ensure that you remain anti-fragile
We leverage the concept of Anti- Fragile by Nasim Taleb
Key Point of Prof. Taleb’s concept.
What that means that If bad things happen, you are ready to benefit rather than getting destroyed. While the probability of this low if it happens, it will ruin all wealth creation. A lot to times when things are doing good, you would think there is no risk, but Risk is always there. Pablo Escobar expected 10% of the cash he stored in warehouses to be eaten by rats or spoiled by mold. That was if everything went well.
Some downsides are unavoidable. You can push back, but they’ll never die. They’re part of life, and you might as well learn to accept them than pretend perfection exists.
What matters is how you plan for them!!
2) Allow compounding to work
To do this decouple all your investment from goals. The only goal which you have is creating wealth. And the simplest way to build wealth is that let money create money whenever you take out cash or break this pattern you're set your self back.
With these two as foundations below is the 2-minute financial planning tool. Answer these questions every quarter to be on track
If I or someone in my family gets hospitalized for 15 days, do I have to break my investments or savings?
Do I have enough savings if my parents to get hospitalized to take care of them?
If I am not able to work or lose my job, can I manage my expense for next three months OR will I have to break my investments/ savings?
In case of n urgent requirement of funds ( Wedding, Brothers College Fees etc) can I borrow money at low costs
If I die, can my family survive for the next ten years?
Is there a goal/ desire in the next three months, which will lead to me breaking my investments?
Am I able to save 30% of my salary each month
Do I think that my finances will beat real inflation comfortably?
That s it!! Any time you hit a NO against any of these questions, you know you need to do something. Whatever financial instruments you are using need to be adjusted or calibrated.
The Nonsense of Short Term & Long Term Financial Goals
Do you the single most important trait of a successful CFO? It is their ability to balance and fund the short term and long term goals of a company.
Closer home we ourselves often the don the hat of CFO as we manage our cash flows.
And like in business sometimes we know about our short term goals and sometimes about our long term goals.
But, in reality, there are often not known!! if you ask anyone they will be very quickly telling their top 3 short and long term goals. However, dig in deeper and almost all these goals would have elements of doubts and uncertainty,
Unfortunately, we have been given a fair bit of Kool-aid that most goals are certain and fixed. This naturally means that there are financial products to hit that goal which naturally means revenues for financial institutions.
Time to relook at this understanding around Goals!
Short Term Goals
Let’s start by looking at Short term goals. By nature, these appear easy but our extremely hard to plan for. In fact, we argue that even if you don’t have goals they will keep coming up. This happens as new things keep happening in life and we rationalize them to be our goals.
A few examples to illustrate this
You have a great iPhone 7 and Apple launches an iPhone X, which is outstandingly brilliant. To top it HDFC Bank and others start giving great discounts.
Now you suddenly have a goal to buy the phone on launch which didn’t exist yesterday.
You wanted a holiday later in the year, but your best friends wedding has been fixed and now the pre-wedding party has to be done in Goal. Going to Goa is a goal now
The point we are trying to make is that the environment we live in things will keep changing and new things to do will keep coming up. And as you can see from the example above they are incredibly hard to plan for.
So any financial tool which tells you about goals but doesn’t speak about these short term goals ( which will come even if you don’t want) is kind of meh!!
So, how do we plan for short term goals? You Don’t!!
Instead of planning for these goals, we need to be prepared for them. Few ways which you can be prepared for this is
Have some amount of cash beyond emergency funds in low-risk mutual funds. Allows you to dip into them
Ensure that you have a good credit score. Allow you to borrow at a very low cost without disturbing your other investments
Credit Cards: Have the best credit cards to get no-cost EMI schemes.
The trick here is to always have a source of funds that help you meet these goals without you touching your Long term investments. To continue with phone example, instead of break your Equity Mutual funs take the phone on no-cost EMI using your credit card
Long Term Goals
Now let’s go long.
Long term goals are something which every single financial app, advisor agent, tool asks you to choose and plan for. The usual tenure for these goals is 10 years and beyond.
We think that is dumb and outright wrong. Let me take a few examples to illustrate this
Child Higher Education: This is my fav !! The biggest assumption is that a child will continue to study in the same way as today and the teaching will keep getting expensive at a certain rate. The COVID-19 though clearly tells us that both of them are completely wrong
Starting a new Venture: This is factually incorrect. If you look at most start-ups you will find founders doing it cause they were passionate about it and thought it was the right time to solve the problem. While have money helps, if you get a brilliant insight you won’t wait for 7 years to pool money and then go ahead.
So what is a long term goal? Surely there has to one. There is and it is the only one.
The only long term goal is wealth creation. Your wealth at any point determines the set of goals you will have.
And since your base is your present wealth any goal beyond 5 years is completely fictional. That is often the reason why goals are not met by most financial apps.
For example, if your wealth is said Rs. 30 lacs while you may plan to have a Jet after 30 years, the more realistic goal would be probably to do a real estate investment in the next 5 years in a city like Mumbai.
And therefore, the best way to achieve any long term goal is to delink your investments from goals !!
Instead, just try and ensure that your wealth keeps compounding and you don’t break the compounding by short term goals or any emergencies.
This goes back to 2007, markets are going crazy, everyone is making smart investments and my friend Sonika is opening the doors of this fascinating world to me. She introduced me to the world of yahoo groups and the money control groups.
People with nicknames discussing trades, ideas, concepts and in just killing it. People with 100x returns on stocks
It left me hooked with just one look.
In a weeks time, I had my broking account opened and I went all in. I moved fast, I listened, I copied tried to grasp all.
I thought I was crushing it
Then out of nothing 2008 happened. The rooms were becoming much quieter, hushed. I was getting scared with each loss. And yet there were few of these nicknames which were wholly relaxed and going on as usual. For them, the game never stopped; in fact, they were upping the ante. All of them got supernormal returns over the next 3-4.
Awestruck, I slowly started getting acquainted with them. Over the next few years, I began to notice that all of them had a pattern of playing this game. Understanding this pattern This would eventually help me start reinvesting in 2011, and since then I have compounded money at > 25% CAGR.
The Big Pattern
There was one common and distinct pattern that consistently stood out among many others. No matter the investing style, this pattern stood above all.
That pattern was: Don’t commit big mistakes.
I started to look, deeply on this pattern.
Slowly clarity emerged that there was a process, a method, checklist in this pattern
That process ensured that they made smart investments consistently. It ensured that they were always sane when markets were going crazy.
Below I try to share some of the processes. Think of it as a game with each checkpoint leads to the next one and the only way to progress in-game is to cross each checkpoint in sequence.
Check Point 1:
Are you ready to be an investor?
See where you fit in the grid
The effort would mean reading books, reports, charts, journals to learn continuously. Time would expect if you can put in at least put in 1-2 hours daily
Irrespective of your style technical or long term or momentum you need a high combination of above to succeed
If you are not in the top right then, you are not ready to go ahead
Check Point 2:
To cross this rubicon answer this question. Is your aim from investment to get maximum gains?
If the answer is yes, you will get hurt. Your Northstar is not maximizing gains but maximizing gains per unit of risk. Joel Greenblatt says “My largest positions are the ones where I don’t think I’m going to lose money.” Any stock can go to zero, but some have a higher probability of hitting that.
These have one or two significant risks live leverage or a single customer. Knowing this requires you to put in both effort and time.
Check Point 3:
You are skilled, ergo you make money
Enter Michael Mauboussin, who says skill is not the only reason for success. Most activities that we think are skill-based have luck involved. Think if you can deliberately mess up any activity no matter what happens. If not, then you know there is luck involved. Let’s take a case
You find a crap stock and are ready to lose money deliberately by buying it. A perfect case of skill doing magic
The next day an MNC decides to buy them! What just happened! Luck in play. The smartest guys know about this role of chance because they position themselves for this by always surviving. Any game of chance is all about survival
Check 4:
Do you quickly learn from your mistakes?
This is a story about Gary Kasparov, which he told in his book.
He would make a wrong move say pawn to E4 in a situation. Most of us would say this is a quick lesson. In a case like this don’t move the pawn to E4. “What were the mental routines that occurred before I made that decision? Don’t do them again”. This is how Gary Kasparov thinks. Doesn’t try to learn quickly but try to learn correctly.
Smart Investments require you to acknowledge
Check 5:
Are you happy being a smart investor?
Are you happy after doing well?
You earn 150000, but someone makes 160000, and you are like damn!!. Money from investments is straightforward but holding that money and being happy about is the real financial plan.
If you don’t, then there is a high chance you would get seduced in doing something which increases your risk.
Do also read basis the above how you should think about planning goals.
It’s 12.30 am, and I surf on Netflix and start watching Vantage Point. A classic pop-corn movie but with an exciting premise.
It shows a presidential killing but from the vantage point of eight different people. A bystander, the assassin, the police offer, the medic etc. I realized as I watched it remembered a brilliant post by Prof. Bakshi on about analyzing an investment opportunity from vantage points of various people.
It triggered the idea that why not use the same way to look at the topic of this weeks post.
So you have a seen this advertisement of iPhone and its available on EMI and you are thinking to buy or not to buy.
Lets look from the vantage point of the brand
The brand’s aim is to get you into their fold or if you are an existing user upgrade you. They know that they can influence you to create an irresistible need but it won’t translate into sales unless you have the money or if they are able to make you think that you have money to buy this product. Therefore, they would be ensuring that the product comes with offers and also with an option to buy on EMI.
Now let’s look at the Vantage point of Marketing teams giving you these EMI offers
Well, they gotta hit the numbers of people spending money on cards! That is what is their incentive.
And hence their goal often is to make the process of buying on EMI as smooth as possible. Also, all of them are competing with each other means that they will try to make the terms as attractive as possible.
So, if you are a credit cardholder or have a good credit score expect sweet deals always coming towards you.
They don’t really care if you need something or not so when you look at these offers know that the sole purpose is to make you buy them.
Vantage point of the store/ e-commerce player offering you EMI option.
Since a lot of shopping, today happens online its imperative to look at their viewpoint.
Their single objective is that you purchase and purchase now. Unlike brands whose objective is longer one e-commerce players are focused on instant gratification!
For the store or e-commerce players is doesn’t really matter if you bought a phone just 6 months ago. As long as your interested they will try to make things lucrative for you.
Remember they have spent a lot of money on marketing to bring you to check out page. At that page the last thing they want is consumer dropping off due to lack of money or poor experience.
Therefore, the will break the purchase into smaller monthly outflows which ensure that everything looks manageable. They will also ensure that there are multiple options so that you are able to find an option which suits you.
Vantage Point of Risk Teams
But in this whole system, there is a team to balance things. That is the credit or risk team in banks. Their job is to ensure that only the good guys get these EMI options.
And they do this by looking at past data to predict if a borrower will mess things up.
If you are getting an offer to buy on EMI especially then they are assuming all will be good for you. However, the interest rates they charge will tell you what is their thinking on the risk you run. Any time they charge a rate of more than 15% you can assume that there is a higher chance of you defaulting in their view.
However, No Cost EMI is a very different beast. Here the brand and the e-commerce player pay the banks interest instead of you paying it. So often, you might think that if an offer is available for you that you are a low-risk borrower. In reality, you might be high risk but just that risk on your behalf is being taken by the brand.
Vantage point of your self.
Actually your vantage point is a sum total of what you see and how others influence you. In case of buying EMI”s online broadly, the system is designed to make you buy things.
That coupled with our innate desire for new things makes buying things on EMI an irresistible thing to do.
How do we counter this? Simply look at the motives of each one of the above. You would look at them realise whether you really need that product or are you being made to believe that you need this.
EMI”s are a very powerful tool. For maximizing benefit of this tool think if
You really need this thing,
while this EMI”s look small is it adding up with existing ones to make a big dent in your income.
How much extra interest you might pay.
Before going do check our blog on how these EMI’s and loans can be mis-sold
5 Laws for Financial Planning! Number 3 is so hard
73% of salaried consumers feel that they have no Financial Planning and are in no control of the way they are managing their money. But if you look at the balance 27%, you would see that they don’t have some magical portions but instead have followed basic laws. The fun part of the law has no relation to finance, which means that all of us can universally use them.
Without further ado, lets check them out one by one
Law 1: The Preserving Optionality law
The law tells that to get maximum gains, you need to keep as many options open as possible. However, the choice must have a limited downside and an open-ended upside.
Betting in a casino is not an option, as the upside is not open-ended. How about putting money in stocks? That’s an option—the upside is theoretically unlimited; the losses are limited to the amount you invest.
What are the situations when you can fail this law? The main reason for failure to abide is when we take limiting choices or have dependencies. Too Much debt, inadequate insurances, etc. are some of the reasons for this.
Options present themselves all the time, but life-altering ones often come up during times of significant change. If you don’t have the option available, you miss the benefits of considerable changes.
Enabling options should be the law which your financial planning process should follow
Law 2: Follow the Pareto’s Principle or also the 80:20 Rule
Pareto’s principle states that the majority of outcomes are driven by a minority of events. Corollary to that is the law that your decision making regarding money should follow this rule.
This means that you need to be ready for the minority events which are game-changing and ignore the majority event which is noise
For example, checking your portfolio value on each day or event is an 80% action. Buying stocks when the market has crashed by 40% or preparing for job loss or medical emergency are examples of actions to benefit from minority events
Law 3: The Law of Conservation and Efficiency
The law states that things in your control ( conservation and efficiency) have the highest likelihood of making the most significant difference over time.
In the world of money, Personal savings and frugality – finance’s conservation and efficiency – are primarily in your control and have a 100% chance at being as effective in the future as they are today.
You can spend time thing how to reduce your borrowing costs but not spend enough time in delaying the purchase, so that fall in the price is more than the borrowing costs.
Often you would spend hours chasing that right stock or mutual fund to get that extra 1% return. However, in doing that you often ignore that investing in an Index fund automatically would give you that additional 1% returns as the fund management fees are lower than an equity MF
Why we do this? The finance industry is constantly conditioning us by portraying a new thing or higher returns in a much brighter light than saving costs or increasing efficiency.
Following this law is the hardest as it is forcing us to goes against a lot of what we are being conditioned to or taught about. Unfortunately, this law is also the foundation for financial planning
You can look at this Warren Buffet documentary on how he has systematically built conservation and efficiency in his life and investing world.
Law 4: Parkinson’s law of triviality
The law states that the bigger the decision, the smaller the time we want to spend on it.
Financial decisions are often complex and usually have a significant impact and that too not immediately but with a lag. When faced with such a situation are thinking is that since this is a complicated situation but actually has a low impact, so let’s take a quick decision and get over with it. It’s too painful to dwell over such decisions as their impact are not known for a long time
That is why the whole world of tips and calculators exist. You punch in data get an output, you spend 2 min to read a tip and then act on them. You think that these tools have made the decision simple, but in reality, you have taken a shortcut to a complicated decision. Multiple such decision destroy the financial planning process
Law 5: Vierordt’s law of Time Periods
The law states that We underestimate long periods and overestimate short periods.
That is why even though are plenty of goal planning tools, they seldom work as its hard for us to visualize what can happen over long periods. Even if we start the process of goal, the short period goals will overtake precedence.
Therefore, the simple thing to do is make the goal which you can visualize always. The most straightforward goal to do that is to create wealth. That is something you can see, track, and achieve consistently.
Bill Gates gives an interesting corollary to this rule.
That’s it. These are the 5 universal laws to follow if you want to manage money or our taking a decision related to money. No fancy math, no investing knowledge just some basic fundamental laws.
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