Blogs from Our Experts | March 03, 2017
The marriage season is fully on and fortunately, I was attending a sole invitation for this season. Thanks to the recently visionary demonetization initiative. People have actually become more cautious to discretionary spends. But surprisingly, what stroke me while participating in an informal chat with the guest (this seems so usual in a marriage party and especially with me, thanks to my profession.) was the discussion on how investor`s behavior towards investment has been radicalized and how a smart investor recognizes the cognitive errors and emotions that stand in his way to smart financial decisions. We are intelligent people, neither irrational nor insane. We are normal-smart at times and normal-stupid at other times. We want more from our investment than money – in fact, investors care about how they make money!! Interestingly, in an Indian society we have investors across the religious boundaries and each has same taste when it comes to investment and make money through Popularly Packaged and marketed Financial Product that might be a miss-fit to his specific requirement.
Although the discussion went through all areas of finance to politics to international events to entertainment, what came out from that “adda” were some interesting behavioral traits that are currently visible to investors across the communities. While I point out my observation on that discussion, I assume that there will be more logical analysis on that. And I also welcome inputs and suggestions to learn further. After all, we love data crunching, discussion and analysis at every events of our life.
First observation - The changing simplicity that defines the wants of every investor. Interestingly, our financial ambition (very interesting and different from our financial need) is linked to our investment decision. We want not only returns but acquire emotional value through our investment. We Indians love sports and it is a religion to us. Our emotions are linked to sports results. Interestingly, we compare our investment activity with playing sports. We want thrill, excitement and pride, yet we are socially responsible. We want the sophistication of Equity funds and the virtue of socially responsible funds. We want to leave a legacy for our children when we are gone. And we want to leave nothing for the tax collector. Interesting!!
Second observation - We want more profit than we take risks. Investment with risk adjusted return is like finding good lunch with fair prices. But to our contrast, we want free lunch and not fair ones. Similarly, we want investment with returns higher that its intrinsic risks. Why do I invest in A (with 4%) over B (around 6%)? A wise man answers that A has lower risk adjusted return over B.
Third observation - We have emotions that are miss-leading and we want to PLAY and WIN. For us investment is a game that enthralls us to find higher return than risks which gives us false confidence in our ability to find them. An emotion includes sentiment, exuberance, fear, and un-realistic optimism – any bias towards any of these may actually exaggerates our positive expectations or pessimism. The game of finding investments with returns higher than risks is tempting. A very few times we accept our losses with regret. Realizing gains by selling investments at a profit intensifies pride because it brings profits into our hands. Realizing losses is especially painful because we give up hope of recouping our losses. This is why we tend to realize gains in haste and procrastinate in the realization of losses. Investors who do not make peace with their losses often dig themselves into deeper losses and throw good money after bad.
Fourth observation - Investors have realized that Investment is not a glamour statement. It is linked to their financial ambition. Now they have realized that Wealth is Absolute and status is relative. They want Financial Solutions and not Financial Product. In simple analogy, you cannot grow health by consuming packaged product over home cooked health food. What is needed is a tailor-made need based specific solution rather than “One size fits all” product. Business chase visibility and that “Jo Dikhta hai, wohi bikhta Hai“ and so our investment decisions. We buy highly visible and marketed product that might be toxic to our financial ambition. We are motivated by our twin desires of hope for riches and freedom from the fear of poverty. We build our investment portfolios as layered pyramids of mental accounts. We place bonds in a mental accounting layer at the bottom of the pyramid, designed to free us from the fear of poverty, while we place Equity asset in a mental accounting layer closer to the top of the pyramid, intended to give us hope of riches.
Fifth observation and the most important one - Whenever we have electrical work at home, we call our electrician and so in case of Car servicing (taking to nearest servicing centre/garage), medical requirement (consulting doctor) or to that sense any service. Unfortunately when it comes to financial advisory we think “we know it all”.
My conclusion and recommendation: How many times have you gone to a dentist to solve your eye problem? Right – We don’t go to a DENTIST to solve our EYE PROBLEM. What we fail to realize is the consequence of wrong financial decision although we face it regularly. But what I realized is that the cost of financial advisory is far less than the service we get. Financial services industry is amazingly knowledgeable industry. We have highly trained and knowledgeable financial advisors who can handle your financial dream from being it your nightmare. Time is changing and taking right financial decision with correct financial analysis is crucial for your financial wellbeing. Regulators are more vigilant today and it is highly recommendable to check before signing your “cheque” for investment. There has been always attraction towards distraction and these lead to destruction. We have seen constant re-invention and radical transformation across our industry and financial industry is no exception. Ola, Uber, Facebook, AirBnB and Swiggy are some examples. Start asking for “Tailor made Financial Solution” over “Popularly Packaged and marketed Financial Product”. Contact your financial advisor and share your financial ambition before taking any decisions. It is even more important to remember that investments are about life beyond money. We can enjoy the benefits of investments ourselves, indulging in a few luxuries, or we might enjoy them with family, friends, and people in our neighborhoods and faraway continents. But, in the end, we cannot take our investments with us.
Note: The writer is Vice President with NARNOLIAVELOX Pvt. Ltd. and this view is purely his personal.