Subramoney

this is a transcript of a talk session Vikram Oza did on UTVi - and it appears on utvi.com too.

Leaving emotions out of your financial decisions is tough. Behavioural Finance is a science that gauges among other things, the rationale of investment decisions. UTVi talks to PV Subramanyam (Subra), financial trainer on the subject and discuss how being unemotional is crucial in matters of finance, especially in these volatile times.

When there was a flutter about ICICI bank, people started breaking their fixed deposits… taking their money out from their accounts… Earlier with the Tsunami, real estate lost favour… People started withdrawing from it. We tend to take investment decisions in panic…

Subra: If a person is serious about his equity investments, he will be emotional about it. It is difficult to say buy a share and not be emotional about it. If you have all your money lying in ICICI bank and you feel there is a problem with the bank you WILL panic.

Do you see people facing losses because of hasty decisions?

Subra: Actually, people do face losses because they react to such kind of news. Either they react a little too early or a little too late.

Markets have come down from 21,000 levels to 8,000. Analysts are saying that it is the right time to buy. But investors are into panic selling…

Subra: That is typically how people react. First, when the market came from 21,000 to 18,000, there was denial… you say this is temporary… At this point, you need to say I will invest in a disciplined manner than react to market prices.

There has been a study on the behaviour of people’s investments as far as their financial investments are concerned…. it’s called Behavioural Finance. This is applied from psychology to see how people react to financial situations. There are certain things like mental accounting. Your mind tends to make you feel good. So when things go wrong your mind tells you that this was your broker’s mistake… the market’s mistake… So you keep fooling yourself that you are very smart, and that you will never go wrong.

Vikram Oza: Don’t people react to panic situations when they don’t know what the future holds, because of that uncertainty, they say, better be safe than be sorry?

Subra: There are two situations. One is to be safe than sorry, the other is to consider what would others think… In a panic situation you should look like you have tried. And you fool yourself by saying ‘I have got rid of all my shares at 9500’. When market goes to 9000, you suffer from confirmatory bias… You say, I knew that the market will go down and the market HAS gone down from 9,500 to 9,000, you think you are very smart. What you have missed is the journey from 21,000 to 9,000. And when the market goes from 9,000 to 11,000, you have already lost the so-called ‘gains’. At 11,000, you say the markets will come down to 9,000 and then I will buy… the rise may  be sudden and stunning!

Keeping all that in mind, if I want to remove emotions out of all my investment decisions, what do I need to do?

Subra: Just go out and invest in some notebooks. Write down in your notebook what you are buying and why you are buying. Write down the emotions part of it. Maintain a personal investment diary and write down all your investments in an excel sheet. See, how much you are earning. Six months later your 200 page notebook will show you what you have done. If you have done very well, good… continue doing it. But, if you are underperforming the index, underperforming the fund managers, don’t invest directly in equities, put your money in mutual funds, in SIPs or in some kind of automated trading. Look at your asset allocation, like how much of your money should be in equity and how much in debt. A Systematic Investment Plan (SIP) completely removes emotion.

Do you approve of automated systems? …Using machines to make your equity investments, would it help?

Subra: Your emotions are completely removed when you use automated systems. In these volatile times, especially, if you are a buying guy, you have to continuously keep buying and selling. In this case, you are much better off giving this to software which is well written. But remember behind the software, there’s a human who has written it logically as to what you should do when the markets are down and all this is thought of and written unemotionally. Even automated systems cannot protect your capital entirely.

One amazing rule of investments is called the ‘Golden Rule of Investing’. The Golden Rule says “he who has the Gold, makes the rules of investing”. If this post gets you nostalgic, you must have been born in the 1960s!

Once upon a time there used to be a ‘ring’ in The Stock Exchange (you dummy it had to be just called this, because the other ones did not exist). The Stock Exchange, Mumbai became the BSE - the Bombay Stock Exchange. The people with the ’sauda’ book went into the ring and executed the transactions. Quotes were given by jobbers (called taravaniwalas). The daily turnover used to be around Rs. 200 crores - anything higher was considered great. There were 100,000 graduates / undergraduates who worked as jobbers, clerks going into the ring, sub-brokers, share transfer clerks, etc.

Then came technology - and the peopl who brought it said ‘now there is tranparency’ - after all the tech people, ‘educated’ people, etc. had to create new terminology. So out went badla, and in came F&O….and many such changes. Jobs changed hands. Frankly do not know whether the benefits went to the investor or the people who created a big army of financial service sector jobs. It would be intersting to see the ‘wealth created’, the ’salary paid’ , the turnover tax paid…velocity benefits everybody except the investor (assuming he is still alive!).

Then came the mutual fund industry - ‘wealth management’ they said it was. Again distribution was required, professionals were required - so ‘charges’ were imposed. Some people made an attempt to understand the charges - the super big guys understood and negotiated it. The smaller guys do not understand the charges though there are some who pretend that they do. The amount of expenses that an amc can charge is decided by the amount of money that they can charge as expenses and its own fees. These were fixed when the aum of the biggest amc was under Rs. 1000 crores. Now it is Rs. 100,000 crores. Mr. C B Bhave has an advisory committee which is supposed to benefit the end investor. I have not seen any MD of any company of any industry say “Regulator please reduce my charges so that the end customer can benefit”. Well bureaucrats have some simple illussions in life, do they not.

For a customer who invests Rs. 100,000 a year for 30 years the load that he pays would be Rs. 2000 * 30 = Rs. 60,000. However even if the fund puts in a mediocre performance, the amc charges he pays would be Rs. 250,000 in THE THIRTIETH YEAR ALONE!

Anne Frank - perhaps the most enduring voice of the World War II - would have turned 80 today. ‘Sadabishekam’ is celebrated as a thanks giving and for a healthy future. Anne Frank’s 80th birthday is worth celebrating because she can never die. Anne Frank is no longer a person. It is a spirit of saying that the meek can be heard. When Anne Frank was pulled out of her ‘Secret Annexe’ in the spice factory the German gustapo did not pick up the diary of a frail girl. She died of illness (no she was not in Auschwitz - her mother died there, her father survived) a few weeks before the British and American soldiers reached Auschwitz. Her father survived, found the diary and made his daugther immortal. So a frail girl captures for posterity - with pictures and sketches - what Hitler did to the world. The powerful Adolf Hitler is remembered with hatred and this frail girl is remembered with moist eyes.

If you or your kids have not read - The diary of Anne Frank - you must. Not because it is the greatest book ever written, but because it is a great story told without self pity. Scared yes, pitied no.

Anne Frank is a spirit. Do not let the spirit die. One day the oppressive machinery will fail - it is surprising that the Germans left behind a small red diary (which her father found and gave it to a couple of American film makers) - and the truth will prevail. There is after all the universal law “Good will bring good, and bad will bring bad”. Once in a while we feel that God forgets this law - that is our weakness, not God’s failure. Like in investing, in the long run price and value shall merge.

A good place to buy this book is Twistntales - a nice shop in Gaikwad Nagar, Aundh, Pune

It is amazing that financial services - mutual funds, life insurance and banking are seen as villians in terms of charges in a country which has so many real estate deals!

Who can become a builder, who can become a broker, how much brokerage to charge, should prices be quoted for built up, super built up….NOTHING is even documented forget being regulated. You could go and look for a flat for Rs. 1.3 crores. On finalizing the flat you realize that the ‘other charges’ - loading, brokerage, stamp duty, parking charges, etc. etc. add upto Rs. 15 lakhs - about 12% of the so called ‘price’ of the house.

At least some of these costs are available upfront, while some of the costs is just a guess - like loading. Sometimes the neigbhouring building also seems to be in the loading - at least in big Indian villages like Mumbai.

The other real cost is the interest cost - let us say you borrowed the full Rs. 1.3 crores + the stamp duty + the life insurance charges - after all you want your wife to inherit only the home, not the home loan as the SBI life advertisement tells you! If you repay this as an EMI - for 20 years, the true cost of your house is Rs. 2.6 crores (without considering the regular maintenance and tear and wear that would have happened).

However if a person sells this house after 27 years, he will tell his friends “I bought this house for Rs. 1.3 crores (remembering the brokers words) and now I have sold this house for Rs. 4 crores - it is a 3 bagger in 27 years. I wish I had bought one more flat”. Mathematically I leave it to you to calculate the profits, and find out the IRR.

Amar Pandit has written a nice article in rediff.com about the list of ‘charges’ while doing a real estate deal. It is worth reading while finalising your house purchase.

this appeared on Utvi when the index was 11,000 or thereabouts…

In the latest episode of Smart Money, UTVi’s Vikram Oza interviewd PV Subramanyam who is a Financial Trainer.

Is it a common to people stop making investments when times are tough?

Subramanyam: When the markets are down, people ask if they can stop their SIP. If you have lost your job and can not make your SIP payments it is still justified.

Kamini from Indore is planning to stop her SIP. Let’s see what her question is.

Even though I started an SIP in an equity mutual fund 3 years back, I am still losing money. Should I stop my SIP?

This is a funny situation, she must have sent in this question may be 5 or 10 days back when the market was not even at 12000 mark. Today she may already be in the money. The market is moving in such a small range that when the market is at the 13000 mark, I am sure this 3 year SIP will be in the money. Last 1 year, SIPs are in the money, last 4 years, SIPs are in the money. Only last 2 years and 3 years SIPs are now losing money. Perhaps when the index is 12300 or 12400, she will already be in the money. And when the market touches 14000-15000, she will very well be in the money.This is a very good time she has gone through this phase especially if she has a long term view.

What are the other things you need to keep in mind while choosing a mutual fund at this point in time?

Subramanyam: Choosing a mutual fund at any time does not change much whether the index is 8000-9000 or 15000. This is because we don’t know what’s going to happen. We just know that over a period of 20-25 years in a growing economy, the income from the equities will be an upward rising curve. So if you have a long term view, you anyway do an SIP in an equity fund. Choose the fund according to your goals, not because something new has been offered to you.

Obviously, these goals keep changing. So how do you account for that?

Subramanyam: Your protection needs don’t change so quickly. If you have a wife and children, and say if your daughter was three years old when you took the fund and today she is 5 years old, so really nothing has changed. But you wanted to retire when you were 52, now may be it is 55, you cannot negotiate with your term insurance and medical insurance. Those risks still remain the risk of dying young, the risk of falling ill, and risk of having a heart attack. So understand that your endowment plan, your pension plan you have some ability to negotiate, whether to pay, whether to get it postponed, whether to reduce the premium. But your term and medical insurance, these are non-negotiable.

What are the other mistakes that people make?

Subramanyam: The other mistake they make is that they buy any product that is reached out to them. When a product is launched, look at it like a medicine. I mean, you don’t buy a new diabetes drug because a new diabetes drug has been launched. Similarly, in mutual funds or any other investment, you first write down your goals. This is my daughter’s education, this is my son’s education, this is my retirement plan and these are the people I need to protect. You do all that and then choose the product.

Also one common question that we get is, how do you choose your fund manager?

Subramanyam: Actually how good a fund manager is largely checked by his past performance. But using the past performance as a check to how he will perform in the future is akin to driving looking at the rear view mirror. Look at a fund manager with a 5-10 year track record and look at the corpus i.e. how many people have trusted him. Look at those fund houses where the CIO or the head who’s managing the fund has not changed for very long periods of time, say 10 years. When you do all this you will ultimately narrow down to 4-5 fund houses. This is I think a simpler way than looking at how they have performed in the last quarter or next quarter how they are going to perform. You have no clue of that. Your guess is as good as mine.

Lots of mutual funds, we tend to put in money looking at their past performance. Is that good indicator or..

Subramanyam: It is not. But the fact that the human mind wants some prop, we use the past as an indicator of the future. Consider a fund manager who has performed very well in the last 10 yrs but in the next 10 yrs the situation may change completely and he could be very bad. Look at good fund house with a good process. So you largely choose some 5 or 6 large cap funds from which you will choose some 1 or 2.  You pick some madcap funds and some small caps funds. Just stick to it.

After that you ask the questions. What questions you ask?

1.How long have you been in this business?
This is for you to understand what’s happening.
2.How much he has educated himself is a nice thing to ask.
And then you look at fund houses where many people have put their money.

Now considering that we have put in money in a mutual fund, obviously there are times when we feel, our money is not being adequately used or is not giving us the kind of returns that we expected. How do we ensure that we get the most of the money that we’ve invested?

Subramanyam: There are two-three things to watch. First is, every mutual fund tells you which is the benchmark. If the benchmark is sensex or the benchmark is nifty and the fund is performing very close to it or all funds are performing similar to what your fund is performing, you don’t have much to crib about. If the best fund is 24% and your fund is 23.29 and the next fund after that is 23.11, really the gap is miniscule over the 30 yr period. Don’t look at what your brother-in-law or neighbor is getting, then you might get hurt. If your fund is achieving your objective, believe me you don’t need to do anything.

So incase you are in dire need of money, then equity mutual funds are the place you’re looking. Hopefully 50% of your investments are in debt and that’s when you are in urgent need of cash.

Sounds very funny does it not? Why would anybody choose to be poor? Or unhappy? Or fail? Well if you read Hindu philosophy in detail you realise the following lessons are taught to you through stories:

You are a function of what you chose to be.

If you are happy you make the choices to be happy and successful - so success follows happiness and not necessarily the other way around!

Happiness is a state of mind - money is important but the importance we give to money is just too much. It is not so important as we make it out to be. It is just like health - you need to have it, but those who have health do not jump up and down saying they are healthy. Those who do not have it know how much it means.

I met a taxi driver (If Meru had a frequent user, I could benefit)…and got talking. He said he went to a barber’s shop and paid Rs. 20 for a shave. On probing I found that he normally spent Rs. 10 for a shave and that meant Rs. 100 a month - Rs. 1200 a year. Then I asked him about his food - he said he eats out every day - that meant about Rs. 100 a day ATLEAST - Rs. 36000 a year.

If he choses to buy a Gillette shaving blade (Rs. 20?) and it lasts him 15 days - he would end up spending Rs. 40 a month or Rs. 480 a year. He could of course choose some unknown brand and save still more! If he ate food from a ‘dabba’ packed by his family he could clearly save Rs. 25000 a year and save some stomach aches too!

If you are in HR do you think it is your responsibility to tell people such basic things? No. Because HR (like most other professionals) do not ever get rewarded for avoiding trouble. If there is trouble and you sort it out you get rewarded!

In every class on wealth management - whether it is 17 year olds in Shimla or 70 year olds in a old age home. Whether it is personal bankers or Hdfc bank or Citigold Wealth Advisors of Citibank - I keep saying ‘how well your money got managed is far more important than how much you earn’. Most people do not understand this fully.

Look at Michael Jackson. He amassed a personal networth in excess of US $ 700 million, and has now died in debt to the extent of US $ 500 million. He was perhaps the worlds best selling musician of all times. There is no problem of how much he earned. In fact he HAD to do this concert tour to reduce (perhaps eliminate) his debt. Which means MJ earned more than what 99% of the world population earns but still could not retire. It is about what he did with the money. I have no clue, and have not done any research. However looking at the financial mess he has left he was poorly advised or poorly implemented.

The saddest thing is no one can predict what the future holds for Prince Michael, 12, Paris 11, and Michael II, aged 7 after their father’s death. Will they have a house, schooling, education, - and what standard of living will they be able to maintain is anybody’s guess. Is it too mundane to ask “Did he have enough in a retirement plan -which cannot be attached by a court?” ‘Did he have a life insurance cover to pay for his children’s future plans?” Did he have enough cover for all the debt he had? Will the children get the same standard of living that they have been accustomed to from the beginning of their lives? Will they need bodyguards - and can they afford them?”

Oh my God! Maybe the kids can only sing “I want you back, I’ll be there” . MJ may have bridged the gap between rhythm and pop music - and become a global icon, but his kids will need cash, his memories will not be enough.

I was recently at a conference for students - and was addressing about ‘ABC of Money’. ABC of Money is a program which is meant to introduce you to Goal setting, Quantifying Goals, Mathematics of Investing, Compounding, Annuity, Risk Profiling, Mutual Funds, Life Insurance, Retirement Planning and Record Keeping. It is a comprehensive program and lasts more than a full day. If it does start at 9 a.m it lasts till 6.30 pm. However, since corporates can afford only one day on such a program we do it as a One day program. Ideally it should be a 2-day program.

This conference was at Shimla and 450 students had gathered from all over the country (and a few outside the country too)- and during the day they were to have parallel sessions - on environment, education, financial literacy, …etc..

What I saw was disturbing. The program which was supposed to start at 9.30 am started at 11.30 am - because the previous night was a ’scullying’ party - the biggest drinker wins! The program was organised in the canteen - so the lunch break was from 1.30pm to 3.15pm. Obviously on the fly, most topics were dropped!

So here were 450 students (tomorrows businessmen and political leaders) who could not stick to a time-table. It is just that simple lack of discipline.

Many students were smoking - I have nothing against it - (as a shareholder of ITC, I actually benefit commercially) but was shocked that there were parents who were throwing so much money at kids that a 20 year old could afford to spend Rs. 200 a day (repeat Rs. 200 a day) on cigarettes - for self and friends. I hate extrapolation, but surely you can add. The smoking and drinking was there to see - and the lack of discipline was visible in how the hotel was abused. The common toilets were not usable. And these were rich kids - it takes money to reach and stay in Shimla especially if you are coming from Bangalore and Chennai!

Though most students wanted to do their higher studies with borrowed funds, most would be funded by an ATM called ‘DAD’ or “MUM”. It is time parents told their kids “You will get admission in a college for which you have the marks and not a college which MY money can buy”. Somwhere parents tell children “I will buy you admission”. I guess either it is too much money which the parents have or the children’s ability to squeeze every bit from their parents that allows children have so much money. Children from less affluent households seem to behave much better.

Obviously because I have not said anything nice about the event (some other things were unprintable) I will not reveal the umbrella under which they had gathered. If my daughter mentions that name to me, I will faint. Parents who want to know the name of the organisation will have to send me their cell phone numbers, surely will whisper in their ears.

By the way did they ‘hear’ me out? Yes. 1 kid was working for Max New York Life Insurance and one was pursuing CFP. 2-3 girls paid attention to what I said and about 12 boys took notes understood, asked questions, asked for my blog, email id, cell number, etc. and promised to keep in touch. They may or may not. However there were 50 people in the class. 30% attention after a scullying night is not bad. Only if I had known it in Mumbai that this was the crowd I would have pretended that I was busy and would have avoided the arduous Chandigarh - Shimla drive for a 1- night trip. That is all!

If you have recently travelled in India you find private taxies - they are far more predicatble and well behaved. If you travel into Mumbai you will be greeted by a long line - normally 40 people in the Q and sometimes 60 people! It is amazing that Meru taxi, Gold Cab and Mega taxi are all sought after by the harassed Mumbaikar, but the ‘powers that be’ deciding that ONLY one private taxi can come at a time! The blue taxies (airconditioned, but with a RUNNING metre!) and the black and yellow taxies behave so badly (at least at the airport) that people do not mind waiting. The people running Mumbai airport, the policemen, Meru management (which is perhaps helpless?), the state government etc. behave like there is no hassle if a few people stand in the queue - what is their choice anyway? If we like in a political democracy why the hell are we being forced in a Bureaucratic Tyranny? Beats me.

It is stunning how being a senior citizen is made difficult - in India as much as in US of A. One senior citizen who is hard of hearing (age 83) was approached by a very nice man who said “You seem to be hard of hearing, I can take you to a person who cured my Dad, please give me your name, telephone number and address”.

The senior citizen obliged. So the ‘good man’ approaches the senior citizen at his residence and collects some oil and other miscellaneous stuff and says we need to buy more ingredients. So off go the senior citizen and the ‘good’ man from Nerul to Vashi where this story took place last week. Vashi has an Ayurvedic Store called Chandan Ayurvedic who give them all the necessary ingredients - and the bill? Only Rs. 45,000. The senior citizen baulked - because he did not have that much. Immediately the amount is brought down to an affordable Rs. 22,900 - because the S. C. had only 23000 in the bank account! End of story? No. Luckily it was a crossed cheque given on a Friday evening so the Senior Citizen could withdraw the money from the bank and also do a stop payment.

Clearly seems to be a case of ‘hypnotism’ or the likes because the senior citizen (I know him) does not spend even Rs. 45 on medicines for himself!

Learning: Senior Citizens should:

1. Keep away from strangers

2. Do not invite unknown people home

3. a guy / gal talks well (very well?) be alert and suspicious

4. Say “I have to consult my…..X…(could be brother, CA, son, son-in-law, wife, husband….any body) before Ican take any financial decision

5. Say “My cheque books are with my son/daughter / …but not at home”