Dear patrons,

Are you watching too much of breaking news on news channels!?

Oh my god, you have fallen victim of Zohnerism.

In 1997, 14 year old Nathan Zohner presented his science fair project to his classmates. He suggested to ban a highly toxic chemical from everyday use. Which toxic chemical? Dihydrogen Monoxide. Zohner provided scientifically correct evidence that why this chemical should be banned. He explained that Dihydrogen Monoxide:

• Causes severe burns while it’s in gas form.
• Corrodes and rusts metal.
• Kills countless amounts of people annually.
• Is commonly found in tumors, acid rain etc.
• Causes excessive urination and bloating if consumed.

He asked his classmates if they actually wanted to ban Dihydrogen Monoxide. 43 out of the 50 children present voted to ban this clearly toxic chemical. Others probably didn’t understand the matter.

Here is the catch, In fact, Dihydrogen Monoxide = Simply H2O. Just Water.

Water actually does cause above things.

This experiment was a representation of how gullible people can really be. He just skewed all of the information in his favor by omitting certain facts. This is notorious concept of Zohnerism. Media use a true fact to lead scientifically and mathematically ignorant public to a false conclusion. They use proven facts to persuade people into believing false claims.

In Investment, digital information is easily accessible but makes an investor victim of Zohnerism. It serves second hand skewed information which is irrelevant. Be a rational Investor.

Get on the edge. News is,

Earthquake in Sumatra, Plane crash in Russia, Attack in Afghanistan, Resignation of some country’s president, New world record in long jump…

Wait… Do you really need to know all these things?

We are incredibly well informed about what is happening around us. Yet we know incredibly little of what actually we should know. Why?  Because two centuries ago, we inverted toxic from of knowledge called ‘NEWS’.

News is to the mind what sugar is to the body:  appetizing, easy to digest – and highly destructive in the long run.

First our brains react disproportionately to different types of information. Scandalous, shocking, loud all simulate us. Where as abstract, complex and unprocessed information sedates us.

As a result of news consumption, we walk around with distorted blanket of risks and threats we actually do not face. Second, news is irrelevant. In the past so many months, you have probably consumed more than 10,000 news notifications. Name one of them that helped you make a better decision. If news really helped people advance, journalists would be the top of the income pyramid.

As an investor, sticking to business news channels about current affairs is immense loss of productivity. It creates more noise than decisiveness. Isn’t it apparently clear by their language that those mediums are trying to sell something and we have to be careful of it.

Instead, read long articles and books. Nothing beats books for understanding the world. We promote decisiveness and avoids noise at all time. Investors who are able to keep peace with mind and heart are the winners.

Dear Patrons,

While eating cherries, why do you pick the best cherries first?

Let me put this in perspective, on hotel websites; they present themselves in the very best light. Only beautiful, majestic images are shown. We of course know these are professional photos but still we fall for fantastic photos. What the hotel did is called ‘Cherry-Picking’

Same happens with brochures for cars. Brilliantly designed brochures makes you to buy higher version of that car. How about real estate scheme brochure? It just shows you wide roads, ample space and expensive cars in the parking. Realty is different in both of the above cases.

When it comes to investing, financial decisions are executed purely on ‘Cherry-Picking’. Why past performance and high return tactics sell easily? By showcasing an outstanding performance, it becomes easy to sell a product but unfortunately a communication about the hidden side of the product is hardly disclosed. Investors fall in to trap of Decorative graphs and fancy literatures that sell easily.

A smart investor should understand that when market goes up, NAVs of schemes too increases.  However investors should compare the performance with benchmark and peer group schemes. By doing this, you will get eye opening outcome. Hence Portfolio review becomes more important than long term hugging to a specific scheme.

Test your Investment decisions time to time. You may have wanted to pick a best cherry but you may end up with bad cherries. So betterment of your wealth, keep testing your own decision making process.

Butterfly Effect

In 1961, when Edward Lorenz (Mathematician and Meteorologist) was working on atmospheric forecasts, he was amazed to find that a minute change from 6 decimals to 3 decimals in the historical data, generated a completely different forecast of the weather. Slight change in the input can cause a large variation in the output. He titled this phenomenon, “Does the Flap of a Butterfly’s Wings in Brazil Set off a Tornado in Texas?”

Before budget, many expected an increase in taxes in some form: either a “Covid Cess” or increase in Income tax or an increase in capital gains tax. However, the Finance Minister surprised with hardly any increase in taxes and taking a higher fiscal deficit target of 6.8% for FY22.

In simple words, one may have a question. ‘Why everyone is praising this budget when there is no tax benefits?”. The answer lies in ‘Butterfly Effect’. No one realized the effect of 1991’s budget on the very same day but it created strong ripples for long term growth. This year’s budget has similar effect which may not be visible today but has huge impact on future.

The intent is clear: the government is looking to spend on capital expenditure to accelerate economic growth. The non-occurrence as per expectation may seem like a marginal change overall, but it has a profound impact in changing the narrative. This is a very pro-investment narrative. The efforts to improve ease of doing business and the incentives provided to businesses have a significant impact on the business confidence in the economy.

The budget improves growth estimates and earnings visibility for many sectors and companies. These companies, sector and themes are likely to see their valuations rerated upwards. Investors, who are patient and have a long-term view will be the ones who gain from this Butterfly Effect.

Dear Patrons,

A story to start with,

The world has seen a swan as symbol of white for centuries. Until in 1697, Dutch sea captain Willem de Vlamingh explored west coast of Australia and during his expedition, he saw a black swan. Since then Black Swans became symbol of unbelievable.

A new term coined as “A Black Swan event” – It is an unthinkable event that massively affects our life. Career and country.”

There are both positive and negative events. Influence of Social media ten years ago and now, Invention of Penicillin, discovery of gold mines, somewhere are positive Black Swan events. Whereas falling of USSR, World Wars and latest one is Covid emergency are negative Black Swan events.

Investment in volatile market has become a daily activity for many investors. Sometimes it goes up and sometimes it goes down. But In general markets move around a stable mean. Our SIPs are ultimately to benefit from the stable mean.

Though we continue to plan for better future. Black Swan events are impossible to predict that destroys our best laid plans. Certain occurrences of events are unknown. We never predicted occurrence events like Covid a year back but it has affected entire human generation today.

How to thrive in Black Swan event?

• Stay out of Debt
• Invest your Savings with continuous eye on it
• Have a generalized standard of living
• Continue points 1,2,3 whether there is any emergency or not.

Dear Patrons,

Does having Rs. 5 crores make you feel rich?

A young enthusiastic young woman thought to have an early retirement. She thought a corpus of Rs. 5 crores would be sufficient for a good retired life. For her, not much is expected by way of inheritance. She has a residential house in which they live in.

She understood that only she has to manage her own earning and investments.

Her salary of Rs.50,000 either goes to monthly living, luxurious life style and EMIs. She has not saved a single paisa till now. She is 24 currently. Let us assume 7% inflation and what her expense will be later in life. (At 7% assumed inflation, Expense to double every 10 years)

At age of 54, her spending would be appx. Rs.4 Lac.

…But story does not end here.

Life expectancy in urban area has gone up. what will be the spending  scenario with same inflation?  (Yes, she is not compromising with her lifestyle)

 Rs.32 Lac per month…. Yes. She will need Rs.32 lacs per month in later years of her life.

That is how compounding of inflation shatters all plans.

So to dream to have Rs.5 Crores as a retirement corpus is sufficient?  Let us examine, how much she actually need at age of 54 to feel rich?

Staggering Rs.12 crores. That is what she should have. Much beyond her plan to have 5 crores.

 Infants, toddlers, kids, teenagers, youth are phase of life. Consider Retirement is phase of life. Take steps calculatedly to take care of uncertain future.

Dear Patrons,

During monsoon, have you heard often that cars and vehicles washed away in gushing flood water? During heavy rains, flood like situation arise. Local water streams and rivers start overflowing and sometimes starts flowing over the shallow parts of the roads. Authorities closes that part of the passage for time being and divert the traffic.

Now Illusion of Attention comes into play here.

We see in news and armature videos that each day cars drive past through it despite visible warning signs and rushing water. The drivers are so focused on their car’s navigation system that they don’t notice what is right in front of them.

Take example of Swissair or Kingfisher airlines of Jet airways, the management was so fixed on expansion that they literally overlooked possible worst market scenarios and eventually they went bankrupt. Similarly in 2007, everyone was so immersed in enjoying upward move of stock market that no one literally checked risks brewing on banks’ books.

In Mutual Funds, investors are very much fixed to the past performance of the schemes that they literally loss the vision for the future. How false would it be to think that a fund having best track record of last 10 years will continue to have the same greatness for next 10 years as well?!? We come across investor saying ‘I have done research on my own’. But is it really a research of past performance and connecting them randomly? Can this be called as research or just number crunching?

Instead, confront yourself with all possible and impossible scenarios. What expected can happen? Pay as much attention to silences as you may get away with noises. Check periphery and not just the center. Something unthinkable can be huge and disastrous. But when you already factor these unthinkable scenarios, their impact can be minimized.

Dear Patrons

‘Consider It Done’

A recently graduated MBA young man goes to an interview of an International firm. During the interview, he is asked that what would be his strategy to boost sales by 30 % while cutting 30 % of the costs. With powerful confidence, he replied ‘Consider it done’. Even tough his heart was trembling on how he would be able to do it.

Just to please the interviewers, He decently exaggerated the possibility of results without realizing actual actions to be put.

The term for such behavior is called ‘Strategic Misrepresentation’

Strategic Misrepresentation is primary power house of sales & marketing departments of large companies. Fairness cream advertisements are strategic Misrepresentation.  An advertisement depicts that having an expensive car makes you powerful person is Strategic Misrepresentation.

How is this related to investment products? Many times investor gets swayed away by obligation under relationship & fancy presentations.

‘Consider it done’ marketing representatives claim false promises to achieve their targets. investor tends to believe it due to their obligation or fancy brand name.

• Does investor need to check benefits & costs of similar investments?
• Should investor grill the sales manager with valid questions?

Misrepresentations will not work when individual information requirement is addressed with right information.

Hello Investor,

In 1966, Frank Blackmore of Transport Research Laboratory in UK designed modern traffic roundabout. Their design was highly accurate to decongest traffic considerably.

However, successfully implemented & operated in UK, It took another 30 years for US & Europe to widely accept & execute roundabouts in their traffic congested roads. In other words, it took 30 years of resistance & unwillingness for them to accept what others have discovered.

‘We are drunk of our own ideas’ which makes acceptance hard to new ideas.

We feel superior for our own ideas not matter how rational and meaningful other ideas are. To overcome, we have to step back & examine quality of our ideas to check whether own ideas in last 10-20 years were truly outstanding? Were we able to build riches from this ideas?

This applies with modern day equity investors. While having invested little time is studying past trends and performance they come up with ideas of their own specifics. However, that turns out to be their individual opinion and which may or may not come true. But with this, they become slaves of their own ill-researched philosophy which is hard to leave behind.

Hopping from Mutual Fund to Equity shares to PMS to alternate fund to commodities to precious metals, Investors think they are optimizing their returns but let me tell you that they are all same asset classes and equally volatile.

We have to learn from the past experience and put it for better use in future. We should remain adaptive to changing environment and act on it much before it is widely accepted.