Belief System.
Question: Your email tied in to a set of discussions I’ve been having recently on the importance of people in our business to have, what I call a “professional belief system”, a set of beliefs that define our professional conduct and our business decisions. In fact I’ve put together a small presentation which I call “Building a Belief System” (see attached). In these discussions, and in this presentation, one of the points I make is that the quality of beliefs depends upon the quality of what we read, hear and experience, and above all, the quality of our analysis of what we have read, heard and experienced. Your response to Mr. XYZ showcases the very high quality of your beliefs and I am contemplating sharing this with participants in my program (subject to your consent, and after removing the addressee’s name, of course).
I recently came across a copy of The Four Pillars of Investing and discovered that it has been re-released with a 2010 Postscript: “What have we learned from the Meltdown?”
I also watched with great interest, the video of you presenting at an Investors Meet in Bangalore. Confession: I was riveted. I truly believe Deepak K Rao has done a great service to people in this business by posting these videos online.
Talking of videos, with the easy availability of videos online, on anything and everything, I spend a lot of my time scouring for good videos. In the process, I now have an excellent repository of videos. Foremost amongst the videos that I have seen over the past few months are a couple that offer an excellent perspective on the 2008 crisis, and if you haven’t see these, I strongly recommend doing so. The first is a movie, Inside Job. The DVD was released in India last month and can be ordered on Flipkart and similar sites. This movie, incidentally, won the Oscar, this year, for the Best Documentary Film. The second is a BBC series, The Love of Money.
One interesting advantage of videos is that there are some knowledgeable people out there, who may not be able to make a strong enough impression through their writing but who are very watchable on videos, relatively at least. A couple of examples come to mind. Mr. Daniel Kahneman, for one, who is regarded as the father of behavioral finance, is not the best of writers. He makes valid points, but his choice of words and expressions don’t easily stimulate the reader. On the other hand, he is a delight to watch in conversations, and addressing audiences, on video. Check out these as examples:
Another example is Mr. Nassim Nicholas Taleb, (he features in one of the videos above). Though his books, Fooled by Randomness, and The Black Swan, are bestsellers, I couldn’t read either, because I found his style of writing very irritating. In his videos he gives the impression of being blunt, bordering on brusque, but that’s a lot better than having to suffer his reading.
Mr. Gerard Colaco: You may freely share extracts of my mails with any of the participants in your programmes. It is one of my life's goals to raise the standards of at least a few investment advisers, and make them true advisers, not salespeople masquerading themselves advisers.
The belief system of our firm is quite simple. It is no different from the belief system I feel that all professionals must have. It is built on a four-pronged foundation:
1. A professional must have an unswerving commitment to the highest level of ethics. Compared to this, everything else pales into insignificance.
2. A professional must attempt to acquire the highest level of expertise in her field of endeavor. A high level of ethics would of course demand that a professional will be a seeker, gatherer and implementer of the best knowledge, insight and wisdom in her field of specialization, in the interests of the individuals she serves. That is why I consider myself to be a mere student of personal finance and investment, not an expert. I wish to leave this world as nothing more than a student, and an eager one at that. I depend on no one for my education, save the best authors in the world. On an average' I read for two hours a day, and at least twice that long on weekends.
3. A professional must have a long-term commitment to quality practice.
4. A professional must practice what she preaches.
I read your presentation on building a belief system, with interest. I agree with the Mr. Nick Murray quote that one who believes is believed, subject to one or two important qualifications. Blind belief does not in turn engender further belief. The blind belief of religious zealots for example while genuine from their point-of-view, would be dismissed outright by persons capable of rational and critical thought. On the other hand, when I as a financial planner have my own financial plan which is based on the same principles that I employ to construct the financial plans of my clients, I am certainly believed, because I bring to the table unimpeachable credibility. When the investments I recommend to my clients are investments in which I have placed my own money and the money of my immediate family, I do not merely have credibility, but virtually command it. I acquire stature. I do not merely acquire credibility, I OWN the damned thing!
In slide 36 of your presentation, you pose the question about whether one should go for active or passive investing. And the belief question to address this dilemma is whether one thinks that good security selection is possible. The answer to this question would be simple, going at least by the US experience. The best security selection over a ten year period has been by a total stock market index fund, because it has beaten 75% of actively managed funds in that period. So, my belief questions would be one, do I believe that over the next one or two or three decades over which I will be investing, the Indian equity markets will get more and more efficient? If so, will passive investing merit a serious look, especially when there are quite ominous signs already that it should? Two, can there be a diversified strategy that combines active investing, passive investing and asset allocation, thereby relieving both the adviser and advised from the stress of participating in the active-passive debate, and instead profiting from it? Let me illustrate by an example I follow in my own advising.
When I advise a client aged say 25, working and earning well, I would handle his retirement needs by recommending SIPs of equal amounts into the following three funds:
- Goldman Sachs S&P CNX 500 Index Fund - Growth
- HDFC Top 200 Fund - Growth
- FT India Dynamic PE Ratio Fund of Funds (FTIDPERF) - Growth.
The first is passive, the second is active and the third is an asset allocation strategy. Three or four decades later, the investor will retire and may need to start withdrawing from his funds. If the stock market is relatively high at the time of retirement, he can choose to withdraw from any of his equity funds. But if the stock market is low, and the investor is reluctant to withdraw from his equity funds, despite fabulous returns from three decades of systematic investing, the smoothening effect rendered by the FTIDPERF will offer the psychological crutch required to take care of this need. I believe that an investment strategy such as this embraces the best of active and passive investing and asset allocation, harnessing all three to the engine of long-term, uninterrupted systematic investing and addresses the most important issue of preventing the investor from running out of money during her lifetime and the lifetime of her spouse.
Thus, if our focus does not shift from the issues that really matter, all fringe debates are meaningless and a waste of time. Which brings me to my central point. In the ultimate analysis, we need only one belief - to always use simplicity and common sense. I do not see these words appearing in any presentations these days. But these are the only tools I use in my practice. That's why I love Mr. John Bogle so much. His magnum opus "Common Sense on Mutual Funds" starts with the two words that are central to, and in fact constitute, the most part of my own belief system - COMMON SENSE, the enemy of which is the hype that is pervasive in today's financial services industry and the financial media.
Similarly, when essentially useless stuff like the Sharpe Ratio or the Treynor Ratio distracts us, I would use this "belief answer" from Mr. Warren E Buffett to trample upon it: "To invest successfully, you need not understand beta, efficient markets, modern portfolio theory, option pricing or emerging markets. You may in fact, be better off knowing nothing of these. That of course, is not the prevailing view at most business schools whose finance curriculum tends to be dominated by such subjects. In our view though, investment students need only two well taught courses - how to value a business and how to think about market prices."
Similarly, I would approach the whole debate about SIP versus STP versus lump sum investments with another "belief answer," this time from Mr. J K Galbraith: "All of the great leaders have had one characteristic in common - it was the willingness to confront unequivocally the major anxiety of their people in their time. This, and not much else, is the essence of leadership." Without understanding the import of this statement, all talk about SIP, STP and lump sum investing is futile. SIP, STP and lump sum are only means to an end. The end should be to confront unequivocally, the major anxiety of an investor during the time she is running her investment programme. If this is not realized, the "adviser" may have her client exiting from the market in a panic at the bottom, just before the next boom, a tragedy that has been played out too many times in the past and will doubtless be replayed in the future.
While on the subject of Beliefs, I have on some occasions of under-employment (of which there have been alarmingly many) dabbled with serious interest on Psychology, with an eye on Investor Behaviour.
Mr. Harish Rao: First of all, thank you for the idea of showcasing Mr. Gerard Colaco's reply as a case study for Investor education / service / anxiety redressal (all in one).
While on the subject of Beliefs, I have on some occasions of under-employment (of which there have been alarmingly many) dabbled with serious interest on Psychology, with an eye on Investor Behaviour.
One particularly interesting concept that you may examine further is 'Guiding Fiction' (GF). Coined by that most amazing and prolific of psychologists - Alfred Adler, 'GF' really determines how we behave. GF is nothing but the notions, myths and beliefs about how we are supposed to think and behave and respond to the world.
GF is developed during childhood and sticks around till we die. The real paradox lies here - GFs are developed during childhood, when our sensory perception is strong, but our intellect is weak. Therefore GF really does not help in stressful adult life. In fact GFs contribute to a weak EQ and adjustment scorecard. (The worst childhood GF is the notion that 'everyone should like you'...which leads to a lifetime of high empathy behaviour with little drive for achieving one's own goals - brilliantly called ego-drive by psychologists). Like what Mr. George Bernard Shaw has been quoted as saying in your presentation on adaptability - much of human progress depends on how we adapt.
Coupled with behavioural biases and myths, GFs offer some explanation on Investor behaviour. Why are Gold showrooms in Mangalore and Kerala filled even when Gold reaches Rs. 28,000/10 gm? Why don't investors do a due-diligence on big ticket property investments?
Now onto some of Mr. Gerard Colaco's observations on Beliefs:
Yes, Beliefs should be questioned on the basis of empirical and statistical evidence. There is no place for Myths and Blind beliefs in Investing. But Beliefs should be tuned to work as the New Guiding Fictions for an Advisor's Life. You have stated that you Walk Your Talk. You will invest in only what you advice and Vice Versa. This is an excellent example of what experts call ' Strong Prosperity Consciousness' - or in layman lingo 'Win-Win Solutions'.
I also chuckled when I read your observation on Sharpe Ratio, MPT and Efficient Frontier. In an era, when even Wealth Managers think that a 40% dividend on a fund with Rs. 40 NAV gives a dividend cheque of Rs. 1600/- and not Rs. 400/-, we have some serious misconceptions to manage at the most basic level.
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