Trivializing the Investment Process

Festivals bring friends and families together and get-togethers lead to discussions. One favorite topic of discussion is the current state of affairs of the Indian polity and the Nation. Recently, I had one such interesting discussion with a friend of mine. We both passionately debated what is wrong with the current situation — rising oil prices, tax burden, poor infrastructure, demonetization, corruption, inept politicians and insensitive administration. We had a good idea about the fixes and were convinced they can be implemented quickly. Reflecting more, I realized the following:

1. When we fixed something like reducing the taxes, we broke something else like increasing the deficit.
2. We made assumptions like salaried class only gets burdened with taxes because it is easy to get them. However, me being on both sides of a corporate and salaried class, I know it is not true. My corporate executive side complains about the tax provisions and their adverse effects on Mitraz.
3. We were aware of many loopholes and wanted the government to plug them immediately. But when it comes to us exploiting some of those loopholes, we believed completely in our right to do so.
4. We abhorred corruption but when we were in a similar situation, we did not hesitate to shell out those extra bucks to get ahead in the queue and reduce our stress and time delay. A good example is traffic violations.
5. We trivialized the problems and their solutions. I always used to wonder why it would take a Ph.D. and an experienced person to just increase or decrease the interest rates. Of course, I know better now with some basic knowledge of macroeconomics and the uncertainty of it.
6. We erroneously believed that today’s fixes will immediately show the result tomorrow. Depending on the problem being addressed, it can take decades and generations to show a meaningful impact from actions taken today. An interesting example is a news I read this week about the Ozone layer repairing itself. See the story at this link Ozone layer on recover track. Actions taken in the 1980s will be showing meaningful results 50–80 years later.

Investment management has a 1–1 mapping to the above. Let me explain:

1. When we fix something like decreasing equity allocation on downward movement of the market, we break something else like foregoing the opportunity to earn higher returns in the future. There are many variables in a system and there are complex relationships between them. Maintaining a balance between these variables and applying to an investor’s situation is important but not a straight-forward answer.
2. We make assumptions that we are the only one impacted by markets and our friends are immuned from it. We don’t look under the hood and rather make comparisons with incomplete information. Who knows our friends may be going through similar emotions?
3. Exploiting the tax loopholes in investments is not new. An example is a complete deduction from one’s income, of interest from second house property in comparison to the ceiling of ?2 lakhs interest on the principal home. This puts single homeowners at an unfair disadvantage. The tax anomaly was removed in last year’s budget.
4. We all have experienced corruption but do not hesitate to promote it for our convenience. We are lured to evade taxes by paying in cash. We justify our action by pointing out poor returns on taxpayers’ money with bad infrastructure all around us.
5. Trivializing the problems and their solution is my favorite one. Many investors believe that investing is all about watching news and charts every day. Even, many of my fellow advisers believe investing does not need a Ph.D. and professional training. An insurance agent considers himself/herself as a Wealth Adviser. When SEBI put the minimum qualifications for being an Investment Adviser, many people winced. The other day I came across an advisory firm in US where the founder is a Ph.D. This is a rule rather than an exception in developed countries. Clients, there, demand professional expertise and are willing to pay a premium for that. Your Adviser may be taking simple steps like STP for a certain duration, but the implications are significant. There is a lot of thought that goes into seemingly simplistic solutions. It is not trivial. You undoubtedly need expertise and continuous investment in knowledge.
6. Investing is for the long term. We need to hold an investment for some time and the duration depends upon the type of the instrument. Buy Today and Get Results tomorrow does not work. You don’t see anything for 3–4 years when you plant a bamboo tree and then suddenly there is this small shoot that starts growing rapidly. Many times, investors get impatient within 2–3 years whereas a typical holding period should be 5 years or more. Like the Ozone layer example above, steps taken today on your portfolio will realistically show results over a period of time and not overnight.

I sincerely hope the above observations help you manage your emotions vis-à-vis investments, allow you to make the right choices and not let you become impatient with short-term adverse movements of the market.