Animal lessons for investors

this is an edited version of an article that appeared in the Wealth column of moneycontrol

You might find it difficult to believe that the best channel to watch for learning about investments is not ET Tv,, Cnbc, Zee business, Sun tv but Animal Planet. Read will know why!

Considering that investor behavior resembles that of herds, it does not sound all that unreasonable. After all, in 2001 we found it hard to convince them that it was worthwhile to invest in equities. In 2007, it was hard to tell them to put their funds in other places too! In 2008 they questioned the logic of ‘SIP’ – In 2009 at 15000 they are hoping for 22000 Diwali….what does one do?

Now that we are warming up to the theme of investors as animals, let’s look at everyone’s favourite Aesop fable – that of the Hare and the Tortoise. The hare investor shows no inclination to get started – he feels he can catch up anytime. On the other hand, the tortoise investor gets going and keeps up a steady pace.

Their Approach
Along the (investment) route, many spectators tell the tortoise that boring things like asset allocation and Systematic Investment Planning (SIP) were meant for ‘ordinary’ people who had no risk-taking abilities. He gave them an all-knowing smile and chugged along. He used his rest breaks to read, and carefully read all signals/ signposts so he had a clear picture of where he was headed.

The hare on the other hand, could catch up in no time; but he went off to explore detours, and basked in public glory. He found three advisors – heck, anyone who had a ‘product’ seemed to find him. Before he knew it, he had IPOs (initial public offers), NFOs (new fund offers) and three e-broking accounts, and no clue why he had them. He discovered that he may be fast, but the financial detours he took needed a long time to get out of. The hare was a brokers delight – he would buy and sell regularly and had his brokers telephone number on his speed dial. When Securities Trading Tax was reduced, he was happy. The tortoise said “I do 5 transactions a month, STT does not bother me”.

Spectators and reporters constantly compared the two and inevitably, declared Mr Tortoise the boring one. “Mr Hare is going places and has big ambitions. He has big holidays, a bigger house,” they would say.

Tortoise would think about his portfolio – cement, hotel and auto shares. He saw the life style of others and added sin to his portfolio. Stocks and mutual funds gave it a big boost, along with SIPs and ULIPs (unit linked insurance plans), and so he plodded along contently.

So who was actually the winner?

The Reality
Look at the bigger picture. Car, house and vacations are expenses. It is assets like shares, bonds, mutual funds and ULIPs that put cash in your hands. So when you see your friend and brother-in-law chasing those luxuries, smile a knowing smile and chug along, much like the tortoise. Chase a bigger retirement corpus instead.

Here is Mr Tortoise’s advice for us lesser mortals:

Set up our own schedules, discipline, targets, etc. The spectators and reporters around you may not know what is happening in your life. Ignore them.
Keep at it every day. If you have a SIP, pay installments regularly. If you say, ‘It is my wife’s birthday this month, so let me skip an installment, it could lead to a habit.
Look for and appreciate the spontaneous shortcut, but ignore those that make you deviate from your targets.
Draw a balance – don’t hurry so you miss sane advice, but don’t be so free that you listen to everyone with a product pitch.
Know the difference between advice and noise. Advice is what we chase, noise is what chases us.
Change your plans, asset classes and products as you change in life. It helps to work to a plan.

Call the tortoise boring if you want but ask yourself would you rather be a boring billionaire or an interesting pauper? The choice, like always, is yours.

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4 Responses to “Animal lessons for investors”

  1. Subra, as usual, a thought provoking piece!

    I’d like to ask you, do you think “boring + billionaire” and “interesting + pauper combinations” are mutually exclusive combinations?

    How about rephrasing it “Intelligent + practical” for billionaires and “Intelligent + emotional” for paupers?

    As for the ‘un-intelligent’ I am sure thats a different ball game!

  2. P.S. – It’ll be worthwhile to remember that animals do not have emotions!

  3. that is the advantage of being an animal. When Amitabh kills a tiger in a movie it is only the ‘small’ viewer who believes it is true. Amitabh knows it is not true, the tiger does not watch movies. So if the ‘small’ viewver is in a crowd alongwith Amitabh and a tiger attacks, the viewer gets killed. Amitabh will be on top of a tree, BECAUSE HE KNOWS his limitation. Exactly same for a small investor watching TV. The anchor knows it is not true (a program is just a cleverly paid for commercial), the ‘expert’ is good at climbing trees….the ‘small’ investor gets mauled. Then he keeps writing letters to Sebi. Most of the bureaucrats keep moneys in SBI fixed deposits. God save the small investor…

  4. Ravinder Makhaik on July 5th, 2009 at 6:51 pm

    Herd mentality only lands you in the slaughter house.

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