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Weekend Reading

Are you misbehaving with your money?

If you are of the opinion that you are behaving cordially and appropriately with your money, you are probably wrong. Given the way our brains are wired, it is impossible to not let our emotions overpower logical reasons. In the academic arena this is known as behavioural economics or behavioural finance. We can look at some routine day to day examples to prove this fallacy.

1. Neha had parked 5 lakhs Rs. in a fixed deposit at 8℅ p.a. and she is also serving a 3 year personal loan of Rs. 4 lakhs at 15℅ p.a.
Now logically it makes so much sense to close the personal loan as Neha has adequate surplus available with her. But by behaving irrationally she stands to lose. Having her money parked in fixed deposit gives Neha tremendous sense of comfort.
Wrong comfort zone, wrong investment decision.

2. Mr. Aggarwal is a so called intelligent investor. He follows Warren Buffett’s maxim, “Buy low and sell high.” He always buys stocks which have hit their 52 week lows and sells the ones that have hit 52 week highs.
However, Mr. Aggarwal has not made money. What is an issue? Choice of an arbitrary reference point. The company which has hit 52 week low may be in the downtrend due to some big problem and may go down further. Likewise, 52 week high does not stop the stock to go up as the company may have produced outstanding results and holds terrific potential due to some discovery.
Wrong reference point, wrong investment decision.

3. Wasim started Investing in ABC mutual fund via SIP 10 years ago. The fund performs exceptionally well and gives Wasim 20℅ compounded returns over 10 years. Wasim is happy as he is able to meet his goal of making down-payment for buying a house and is also able to prepay his car loan.
However, Wasim gets disappointed when he comes to know that his friend William has got 23℅ return during the same period.
Well, fund manager does not ideally aim to generate best returns but the returns should ideally be enough to meet investor’s goals. But Wasim started comparing his returns with William’s fund. However, what was the risk taken by William’s fund manager to generate extra 3℅ returns???
Wrong comparison, wrong investment decision.

4. If you analyse the stock portfolio of a large number of investors, you will notice the following.
a. There are few multibaggers.
b. There are quite a few failed stocks.
This happens because people hate losing money. They are affected by loss aversion. Similarly when the stock appreciates they are eager to book profits. Selling early denies investors huge amount of potential profits. Peter Lynch rightly said, “If you cannot imagine to see your investments going down 50℅ you should not be in the market. You are not yet ready.”
Wrong timing, wrong investment decision.

These stories amply prove that humans are emotional fools. Remember how companies shape our behaviour to make more profits.

#learningneverstops

Kaustubh Deole

Fixed Deposit = MASK

Friends

Last week i visited a prospective client through a reference. He shared his idea of saving & preserving money. He shared his details & my goodness; he is sitting on worth 30 lacs in Fixed Deposit!

The emotion of preserving money is great but the question is is it increasing as compared to inflation?

Obviously not.

People still think FD as a superior option to preserve money. I would rather say, the person who has invested in FD is an utter loser.

FD should ideally contain only the amount which can be used in emergency situation.

Kaustubh Deole

New Mis-Selling Strategies

As a regular writer & educator on different aspects of Investing, last week i received a call from my old client.

Being a lady, she had concern for her nephew, who was having business & was requiring immediate loan for business purposes.

The nephew had received a call from a reputed lending company & were insisting to buy traditional life insurance policy for getting the loan.

She asked for my help.

Friends, i regularly educate through various forums & blogs.

These revenue greedy companies go at any level for promoting their products. They are least bothered about client & his family as insurance is a contract signed by the client to pay premium for the complete term.

If any death occurs, the death claim or at maturity, the maturity amount is paid to the assignee i.e the lending company.

Analyse, you have taken a loan of 5 lakhs without any financial documents, you don’t have to pay EMI, just pay insurance premium of 60000/- every year for next 10 years.

At maturity after 15 years, the lending company, who is the holder of insurance policy will receive the maturity amount which will not be paid to you.

This is a viscous circle of mis-selling of life insurance policies.

Purpose of Insurance:- “Insurance is a means of protecting financial loss”

Small business owners, new businesses, vendors, housewife’s, salaried employees with additional business are soft targets of these companies.

My advise– Stay away from such offers, invest wisely.

PS: I have complete recording of the above mentioned sales call. If anyone needs to check it, pls comment.

Kaustubh Deole

Weekend Reading

The Porcupine Story

The story goes that it was a particularly harrowing time in porcupine land. The winter was severe and the porcupines were finding survival difficult. They were freezing to death.

That’s when they held a meeting to decide on a course of action. As they got together to discuss their survival strategy, they discovered that just by being in close proximity with each other they were able to feel warmer and protect each other.

Being closeted together meant that their bodies generated heat which helped keep everybody warm. So they found they could survive the cold by just staying together!

But there was a problem.

As they moved closer, they found each other’s quills to be a bother—they poked and hurt.

Feeling the discomfort, some porcupines decided to avoid the pain from the quill pokes and moved away.

And as they ventured out on their own, the cold got them and they died.

Soon better sense prevailed and the porcupines realized it was better to stay together and survive rather than go out on their own and die.

Getting poked by the quills of porcupines that were close to them seemed like a small price to pay for survival.

This story has a great lesson for investors.

1) Investors afraid of market volatility redeem their investment because volatility seems to hurt them. Only if they could tolerate a little volatility their lives would be much better off in due course but their fear gets the better of them and they hurl themselves into a bigger crisis.

2) Another lesson investors can draw from this story is of leaving their Advisors and practicing self advisory or self medication whatever one may like to call it because the small fee that they have dispense seems to hurt them. They eventually venture out on their own and with no Advisor to manage their irrational and emotional behaviour, they too fall prey to greed and fear and lose their way.

#learningneverstops

Kaustubh Deole

First Home Survey Poll

pexels-photo-106399.jpeg

At which age you purchased your first home?

Pls enter your answer in comment box – If not, then when are you planning to buy or Would you prefer to stay on rent?

Your personal data is secured.

Compounding needs time

You can’t build your body overnight. Time has to spent through compounding.

Through the power of compounding, a small amount of money over time can grow into a substantial sum.

Compounding is an investor’s best friend.

Investments can increase in value over time – and the longer the time frame, the greater the value. This is achieved through returns that are earned, but not spent.

When the return is reinvested, you earn a return on the return and a return on that return and so on.

Therefore it is important to start saving early in order to benefit from the power of compounding returns.

Kaustubh Deole