Friday, October 23, 2020

How Is Your Relationship With Money?

Things that have never happened before happen all the time – Scott Sagan

A book review this time – The Psychology Of Money by Morgan Housel. It is the only book I have read twice, just because I enjoyed it so much and there was so much wisdom in it. Must read for everyone. Let’s look at three stories from the book (out of many) that really appealed to me and I hope will be of interest to you as well.

Story 1 -

Ronald James Read was an American philanthropist, investor, janitor and a gas station attendant. He fixed cars at a gas station for 25 years and swept floors at JC Penny for 17 years. He died in 2014, aged 92 with a net worth of more than $8 million leaving $2 mn for his stepkids and $6 mn for charity. A fortune made with meagre savings put into blue chip stocks and being patient.

Richard Fuscone was a Haward educated MBA at Merrill Lynch and was so successful that he retired at 40 to become a philanthropist and was on the “40 under 40” list. In the 2008 crisis high personal debt and illiquid assets made him bankrupt.

Ronald Read was patient, Richard Fuscone was in a hurry. That is all it took to eclipse the massive education and experience gap between the two. Only in investing outcomes can a janitor beat the most qualified people. Financial success is not an outcome of hard science but a soft skill, where how you behave is more important that what you know. Luck plays a large part in the final outcome as well.

When things are going well, realise it is not as good as you think. You are not invincible and if you acknowledge that luck brought you success then you also have to believe that lucks’s cousin risk is around the corner and can turn your story around as quickly.

Failure is a lousy teacher too as it seduces smart people into thinking their decisions were terrible when sometimes they just reflect the unforgiving realities of risk. The trick when dealing with failure is arranging your financial life in a way that a bad investment here and a missed goal there won’t wipe you out and you can keep playing the game until the odds fall in your favor.

The correct lesson to learn from surprises is that the world is full of surprises – Daniel Kahneman

Story 2 -

Investment duo of Warren Buffett and Charlie Munger was actually a trio 40 years ago – Rick Guerin was the third partner. In words of Warren what happened to Rick “Charlie and I always knew that we would become incredibly wealthy. We were not in a hurry to get wealthy, we knew it would happen. Rick was just as smart as us, but he was in a hurry.” What happened was that in the 1973-74 downturn Rick was levered with margin loans. And the stock market went down almost 70% in those two years so he got margin calls. He sold his Berkshire stock to Warren at under $40 a share. Rick was forced to sell as he was levered. Taleb puts it brilliantly. Having an edge and surviving are two different things – the first requires the second. You need to avoid ruin. At all costs.  

Success is a lousy teacher. It seduces smart people into thinking they can’t lose – Bill Gates

Story 3 -

December 29th, 2008. Wall Street Journal front page. Russian professor Igor Panarin.

Around the end of June 2010 or early July the US will break into six pieces – with Alaska reverting to Russian control, California will revert back to form the nucleus of the “Californian Republic” and will be part of China or under Chinese influence. Texans will be a part of the “Texan Republic” a cluster of states that will go to Mexico or fall under Mexican influence. Washington DC and New York will be a part of the “Atlantic America” that may join the EU. Canada will grab a group of northern states.

This was at the height of the financial crisis and only in these times a story like this could appear at the front page of the most prestigious financial newspaper in the world. Pessimism just sounds smarter and more plausible than optimism. Tell someone that everything will be great and they will shrug you off or offer a skeptical eye. Tell someone they are in danger and you have their undivided attention. Assuming that something ugly will stay ugly is an easy forecast to make. And its persuasive since it does not require imagining the world changing. But problems correct and people adapt. Threats incentivise solutions in equal magnitude. That is a common plot of economic history that is too easily forgotten by pessimists who think in straight lines.

Progress happens too slowly to notice. Setbacks happen too quickly to ignore.

The psychology of money is actually our psychology, which is shaped by many things including our personalities, past experiences, relationships, outlook of the future and hence as unique as our fingerprints. Like our other important relationships, our relationship with money is never perfect and evolves with us and (hopefully) gets better with time.

Friday, October 9, 2020

The Powerful Banker

A light hearted satrical this time. A work of fiction. Any resemblance to a living person is purely coincidental. 

Pessimism is logical, cold and calculating. Optimism is warm and uplifting, a leap of faith. Pragmatism is nuanced. Choose well.

Now lets get to business. This powerful banker. Lets call him Mr U. You think of him when you think of investments. The complete man. The consummate relationship guy. Everyone who knows him knows that he knows everything. Even he knows that he knows everything. That has made him the richest banker not only in the milky way, but the entire universe.

Bankers are conservative. He is a super banker. So that makes him super conservative. We all know the story of the bunny that kept telling everyone that the sky is falling. Well Mr U can play that role very well, but he will be the lion in this story and not the bunny, as he is the king of this jungle. The lord of the rings.

He is called upon to fix broken things. He is tasked with fixing a big problem but has made little progress in over two years. Maybe there is too much on his plate. Maybe things are so broken that they cannot be fixed. Maybe the longer things remain broken the better for him. The one eyed king in the kingdom of the blind is still a king.

He can take on the regulator and emerge victorious. His investor calls start with a grim reminder of how bad the situation in his home country is and how his empire is the shining example of exemplary work. Either he believes only he has the foresight to see these things, or only he has the guts to say these things, or only he can say publicly what others say privately. Anyways he has been saying all this for so long that he is hoping all these come true. You see the longer you keep repeating yourself the more you reinforce your own beliefs.

The last time he was so confident was in 2008 after the Lehman collapse. All his PMS were on record cash and did magnificently while the markets melted. The strategies remained liquid (reference stock market meltdown) and missed the big rally of 2009 so badly that the schemes had to be wound down. In 2008 you were driving a car. Now you are driving a bus. Your organisation size and stature have changed and you need to change as well.

In Dangal before the final bout the encouraging words of Mr Phogat to his daughter were “if you win tomorrow, you will become an example (misaal). And examples are never forgotten, they are always given as a reference”

JP Morgan became JP Morgan when he displayed his grit and character in tough times, standing up to deliver when times were the toughest. That is why he is still considered the greatest. Otherwise all bankers think they are the centre of the universe and are forgotten as soon as they retire. Hope is a good thing. Don’t take it away from people, if you can’t give it to them. You are in a country which is marching towards its “tryst with destiny.” Do not make fools of people who have taken risks by starting a business or taking a mortgage or any other loan. Everyone does well if the country prospers. We should keep our worst fears to ourselves and not make grand business plans around the possibilities of the nightmares coming true. Maybe the sky will fall. Maybe the world will come to an end. After all, we are all dead in the long run. But when that time comes, you may not be happy to say “I told you so”.

Mr U is also a gifted cricketer. When destiny gave him a full toss, he ducked as if it was a hand grenade. Not everyone is lucky to have a second chance. There are still some balls to go and the innings are in your hands. So play well. And if you can’t let others come and steady the innings.

There is still time to become a misaal. Grab it with both hands, while destiny is still kind. There is a big difference between intelligence and wisdom. Choose well.