I play cricket on Sundays. There is a young mutual fund relationship manager (RM) of a big AMC who plays with us. We have been playing together for more than a year now. But I never discussed anything about mutual funds with him. He doesn’t even know what I do. Yesterday I talked with him about mutual funds for the first time. This was our short conversation.
What are you selling these days?
“Debt Funds. Equity may not give any return over the next one and a half years.”
Which debt funds are you selling?
“Gilt Fund and Long Term Debt Fund.”
Why?
“Because interest rates would start coming down over the next couple of years. There is inverse relationship between interest rates and return from debt funds.”
Isn’t equity a long term asset? Why worry about what may happen in the short term?
“I understand, but clients don’t understand. Equity markets will be range bound for a couple of years now. There could be time correction.”
Do you receive a communication from the AMC about which products to pitch or do you decide?
“Both. There is a communication from the AMC and we use our brains too.”
I thought of saying a few things, but then decided against it. His understanding and style of advice does the job for him. Why discuss things that may reduce his conviction in what he does and hurt his performance as a RM.
An expensive lifestyle puts pressure on kids who may not cope with it
Father was a successful man who lived like a king. He left the inheritance to the only son which can make a middle-class man financially free twice over.
Son earns a good income. But his income cannot cope with the expensive lifestyle his father left him. He has to pay the salaries of a cook, a driver, maids, and other staff.
His mother, who was the wife of a rich man, is used to the comforts her husband provided and doesn’t want to let the staff go.
Son is also used to an expensive lifestyle. His financial goals are those of a rich man. Even with the inheritance, the savings required to achieve all his financial goals is more than twice his income. The family’s average monthly expenses are more than the average monthly income. These expenses would start eating into the inheritance father left.
The situation is not hopeless. But the family will have to cut down their lifestyle expenses drastically and rationalize their financial goals. This will take away some comforts they always enjoyed. It could be stressful for the family and may create strain in the relationship with family members who believe they can continue to live like before.
Son is fairly successful in his own profession, but he would feel like a failure because the financial barometer of the family is set too high.
An expensive lifestyle puts pressure on kids, who may not cope with it.
Thinking Twice does not guarantee Acting Wise.
Couple of days back I had participated in a public speaking competition. Topic was “Think twice Act wise”. Time allotted for each participant was strictly three minutes. I found it difficult to elaborate my point on the topic in three minutes. I needed more time also because I had completely different point of view on the topic from all other participants and also from that of the judges who spoke before announcing winners. I am writing this article to make an archive of my thinking on the topic.
“Think twice Act wise” is conventional wisdom. It says that if you think before acting you will act wisely. You will not commit mistakes if you think before plunging into action. But in real life thinking twice, thrice or even hundred times does not guarantee that you will act wisely. Let me explain why I say this.
Thinking is examination of facts or processing of data to arrive at decisions or conclusions. So the quality of the output of thinking depends on the quality of softwares, algorithms and mental models that process data and facts in your brain. If you have right mental models you will arrive at right conclusions which will then result in wise actions.
Unfortunately we are not born with quality mental models and softwares. Our parents, teachers and society around us keep installing (mostly faulty) softwares in our brain right from our childhood. These softwares shape our philosophy and even our goals, aims and ambitions in our life. They shape our thinking. Therefore most of us do not think any different from the society we live in. In fact most of us do not think at all. What we call thinking is simply rearrangement of our prejudices as the American philosopher William James put it.
What makes things worse is that our brain has inherent flaws. It takes shortcuts, it has biases and it is wired in a way which makes it vulnerable to misjudgment. It repeatedly commits same mistakes, it takes irrational decisions and then tries to rationalize them. This irrationality is predictable and therefore we can easily be fooled and manipulated. Good salesmen are trained to exploit these flaws in our brain. Most successful salesmen are impeccably dressed because our brain takes shortcut that a man who looks an expert must be an expert. Brain is not naturally wired to understand that looking and being are not necessarily the same things. One more dangerous shortcut brain takes is that approval of majority is the evidence of a thing being right. This tendency is at the root of our herd mentality. There is ‘monkey see, monkey do’ tendency deeply ingrained in our psyche. This is why we cannot help but stand up and clap for a speaker when everybody else is doing it even if you are not impressed with him.
Social scientists have been studying decision making process of human beings for years now. Today we have good understanding of how human beings take decisions, how our inherent biases and prejudices influence our decision making and how our irrationality is surprisingly predictable. Unfortunately this knowledge of psychology is repeatedly used against us everyday and we keep falling prey to it.
If you want to observe how influence tactics are used to manipulate and fool naive people, read Robert Cialdini’s book ‘Influence’ and then attend business seminar of any Multi Level Marketing Company like Amway or Harbalife. You will see almost all influence techniques being used in those seminars. People who do not have any understanding of these influence techniques have no defense against powerful manipulators like MLM companies, insurance agents and salesmen. They make people think what they want them to think and people do not realize that they have no control over their own thinking. So much for “Think twice Act wise”.
Wise thinking and wise actions are functions of wise and trained brain. You have to acquire worldly wisdom first to be able to take wise decisions. And acquiring worldly wisdom is a lifelong process of equipping yourself with mental models from diverse range of disciplines. The most powerful of these mental models are found in psychology. Without correct mental models you are no better than a one legged man in an ass kicking contest as Charlie Munger the vice chairman of Berkshire Hathaway put it.
Let me end my article with the words of Charlie Munger.
“Acquire worldly wisdom and adjust your behaviour accordingly. If your new behaviour gives you a little temporary unpopularity with your peer group then to hell with them.”
You can begin your journey towards worldly wisdom with the following books
1. Influence by Robert Cialdini
2. Predictably Irrational by Dan Airiely
3. Poor Charlie’s Almanac: A collection of speeches and talks by Charlie Munger
4. Fooled by Randomness by Nassim Taleb
Read these books to begin with and the world will start appearing different to you. And maybe you could act wise by thinking twice someday.
🙂
The slavery of giving RMs business to maintain good relationship with them
I have not picked up call of my HDFCLIFE RM since 8th of this month. He calls me daily to take follow up of the business he expects from me for his March target and I refuse to pick up call every time he calls. Its not that I dislike him personally but I don’t want to work under any compulsion. Secondly I want to free myself off this slavery of giving RMs business to maintain good relationship with them and keep them happy. I have done that in past but I will no longer do that.
I want to be a complete owner of my time. I would spend whole day nay whole week reading books and doing nothing else if that is what I want to do. I would call for appointment and go on appointment only if I am in mood to do that else I would watch YouTube videos all day. I left job to be able to live like this. And today when I can afford to do that, I want no person to adulterate my mind with their boring ideas of success, failure, sincerity, hard work and all that bullshit to make me feel guilty of the way I work. I am answerable only to my clients who pay for my commissions and not any RM or his company.
To borrow from Howard Roark of Ayn Rand’s novel ‘The Fountainhead’ I want to say that I do not recognize any RM’s right to a single minute of my life or to any part of my energy no matter how great his need to complete his target. I am writing this to say that I am the IFA who does not exist for RM but for his clients.☺
I hope they understand my stand and stop expecting business from me as and when they want.
Would you switch from a high AUM Midcap Fund to a low AUM Midcap Fund?
Does AUM size influence performance of the fund?
This question has haunted me for quite some time now. Few months back I raised this question in facebook group Asan Ideas For Wealth and response I received from experts was majorly negative.There is no empirical evidence so far in Indian Mutual Fund industry that AUM size influences performance of the fund. I stopped worrying about AUM size after that though I was not fully convinced.
The issue of AUM size again came to my mind today during a presentation by Birla Sunlife Fund manager Milind Bafna who manages BSL Pure Value Fund.
While talking about his fund, he said “A year back this fund was 30 crore AUM fund and we had only 18 stocks in the portfolio. So it was easy for us to deliver returns. It quickly became 70 crore fund and then investments started flowing in. We added more stocks to the portfolio and number of stocks went up to 60. Today we have 44 stocks in the portfolio and we are trying to reduce it to 35.”
Listening to this I asked “You said that it was easy to deliver returns when fund size was 30 crore. Do you mean to say that it increasingly becomes difficult to deliver returns as fund size increases?”
He said “Not exactly but once size of the fund increases fund manager’s options start reducing. We have couple of low liquidity stocks in our Pure value fund portfolio but Frontline Equity Fund cannot have these stocks in its portfolio. Say there is a good stock having market cap of 250 crore, I can keep that stock in my portfolio but Frontline Equity will have to buy that company to benefit from the growth of that stock which it cannot do. So we can say that high AUM does influence performance of the fund to some extent.”
I further asked “In case of Midcap funds, fund manager will be forced to include large cap or high liquidity stocks once his AUM size increases beyond a point. So can it be a good idea to switch from a high AUM Midcap fund to a low AUM fund even if the fund has given us good returns?”
“Honestly, Yes!” said Milind Bafna.
So it is a good idea to switch from a high AUM Midcap fund to a low AUM Midcap fund.
Can’t it a be a good idea to do the same with Multicap and Large cap funds also?
AN IDEALIST PROFESSIONAL 