Knowledge and expertise are not fungible

“All of them were clearly intelligent and knowledgeable about a great many things – as long as those things had nothing to do with their money.


Most of them simply didn’t understand the principles of investing.”

Liz Davidson, Founder and CEO of Financial Finesse writes in the book “What Your Financial Advisor Isn’t Telling You – The 10 essential truths you need to know about your money”

Financial Finesse is a sort of a helpline in the US for people to get guidance on their personal finance matters. The above lines talk about the behaviour and attitude of generally intelligent and successful people. These are educated and intelligent people, successful in their respective fields of work. However, that expertise and knowledge are not fungible. Expertise in one area may not mean expertise with money.

In the absence of proper knowledge one is unable to understand or see the risks properly. Half knowledge can sometimes be dangerous. As we know from the Mahabharata, it was half knowledge that actually killed Abhimanyu.

As with Abhimanyu, who could not get out of the seventh chakra of the chakravyuh due to insufficient knowledge, many investors have painfully found that it is easy to get in an investment, but it is most difficult to get out of it, if one does not know enough.

Be careful with your investment. If required, take professional help.

#RidingTheRollerCoaster – 123

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Ask, ask, ask

Questions are the best weapons in the hands of an investor.

Ask, ask, ask – you always had the right to information before signing the cheque.

Ignorance can be hazardous to your financial health. Remember Abhimanyu in Mahabharata. He lacked knowledge and hence getting into the chakravyuh was possible, but he could not get out of it alive. For many investors, while it is easy too get into an investments, getting out causes all the troubles – mostly the lack of knowledge is the starting point.

#RidingTheRollerCoaster – 75

Review of the book by Prof. Pattabiraman Murari

Popularly known as Prof. Pattu, he runs a very popular personal finance blog:

Review: Riding The Roller Coaster -Lessons from financial market cycles we repeatedly forget

 

A review of Amit Trivedi’s new book, Riding The Roller Coaster -Lessons from financial market cycles we repeatedly forget.

I was fortunate to listen to Amitji on March 1st 2015 at the Mumbai Investor Workshop. We were short of a speaker and Subra requested Amitji  to speak on debt mutual funds.

Amit Trivedi is a renowned BFSI trainer who runs the Karmayog Knowledge Center

I am a fan of anyone who can objectively talk about investment risk. His talk was various risks associated with debt mutual funds and how to keep it simple. He has a calm and collected persona which shines through his work.

Before we head to the review, I would like to point out that I rarely complete books. I just don’t have the attention span to do that. “Riding The Roller Coaster -Lessons from financial market cycles we repeatedly forget” is a book I completed because it is a compelling read. I also don’t know how to write a proper review. I am just going to cover the gist of the book and my experience reading it.
Riding-the-rollder-coaster

What is the book about?

“Lessons from financial market cycles we repeatedly forget” is an apt title. That is just what the book is about. Don’t feel the same way about ‘riding the roller coaster’.

Don’t feel the same way about ‘riding the roller coaster’. There are too many books with that name or  close variants.

This is a book about greed. About asset bubbles, about market crashes and my favourite phrase in finance – investment risk. It is to the author’s credit that he has managed to convey a complex subject in simple, easy-to-understand language.

It is a book meant for the retail investor to understand, compare and contrast the reasons behind the major stock market, bond market and commodity market crashes that we have seen so far. The book emphasizes the importance of being diversified at all times and avoid leveraged investing.

The Contents

The book can be divided into two parts.

Part 1

A series of past economic bubbles and past market crashes are discussed. I present below a brief snippet of each (Pictures here are provided for context, are from Wikipedia and not part of the book).

For those who are not familiar with these economic bubbles, the book is the quickest way to understand the reasons behind the rise and fall.

Tulip mania:  In the 1630s, the Dutch started speculating on the price of Tulips bulbs. Tulip bulb contracts (promise to deliver) were changing hands at ever increasing prices without any actual deliverable in sight. It is believed that bubonic plague resulted in abrupt reduction in trading and bursting the bubble.

Tulip price index1.svg
Tulip price index1” by JayHenry – Own work from data of Thompson.

The south sea bubble In 1710, the South Sea Company was formed in England and claimed that it had a monopoly to trade with Spanish territories in the South seas.

Investors gave up regular income from government bonds and exchanged them for company stock in the hope of rich and regular dividends.  The company carried out no business, manipulated stock price and soon the price came crashing down. This is crash made popular by Benjamin Graham in the Intelligent Investor – the one in which Sir Isaac Newton lost a fortune.

South-sea-bubble-chart.png
South-sea-bubble-chart“.

The Great Depression

The 1920s was a decade of innovations and productivity. In order to participate in surging stock market, investors, including Ben Graham purchased stocks on borrowed money. When banks realized it was dealing with bad debt, it started selling shares which triggered the crash.

1929 wall street crash graph.svg
1929 wall street crash graph” by Lalala666

The book details how Ben Graham quickly realized his mistakes and save his partnership from ruin.

The Japanese Bubble  when inflated real estate and stock prices came crashing down in 1990. If interested, you can read my study of Rupee Cost Averaging in a Sideways Market with the Nikkei.

Nikkei 225(1970-).svg
Nikkei 225(1970-)Opens in a new window” di Monaneko – http://www.stat.go.jp/data/getujidb/zuhyou/d09.xls

The Great Indian Securities Scam (1992) When Harshad Mehta became a broker in the debt market to finance his stock investments and started to misuse bank funds. How he jacked up stock prices with his definitions of ‘value’ in the early 1990s.

Slide13

The lone point on the right is because of the price manipulation by Harsha Mehta. Read more: What Return Can I Expect From Equity Over the Long term? Part 2

The IPO Mania (1995) when investors were sold IPO application forms without any guarantee of allotment!  The mania ended when IDBI deferred its IPO issue.

Long term capital management

This is a US Hedge fund which took on risky arbitrage positions driven by leverage.

If you wish to know more about what arbitrage means, you could consult these links:

How Do Arbitrage Mutual Funds Work?

Can You Think Of A Risk-Free AND Tax-Free Mutual Fund?

Risky arbitrage?! An arbitrage opportunity carries minimal risk only when the underlying security being traded in different markets is the same! Amitji warned that such a danger could well be present with arbitrage mutual funds as well during the Mumbai meet.

LTCM assumed the currencies of weaker and stronger European economies would converge in time. When Russian defaulted on its external and internal debt, the arbitrage spread widened and became larger than the cost of borrowing. The fund crashed.

LTCM.png
LTCM” by JayHenry – Own work.

The dot-com crisis When every dot-com company was believed to be the ‘next best thing’.

Nasdaq Composite dot-com bubble.svg
Nasdaq Composite dot-com bubble” by Lalala666

The sub-prime crisis When it was believed (again!) that real-estate could never crash and bad debt was creatively structured as a high-rated bond.

Subprime mortgage originations, 1996-2008.GIF
Subprime mortgage originations, 1996-2008” by National Commission on the Causes of the Financial and Economic Crisis in the United States – Final Report of the National Commission on the Causes of the Financial and Economic Crisis in the United States, p.70 figure 5.2.

Part 2

This is the most delectable part of the book. Given these crashes, Amitji goes about comparing and contrasting them to offer us patterns common to these economic bubbles: greed, leverage, ignoring basic notions of valuation, euphoria, a sense that this time it would be different!

This part would appeal to everyone – those familiar with the crashes and those reading about it for the first time.

The book is filled with anecdotes and interesting quotes. Here are my favorites:

“What we learn from history is that we don’t learn from history” – Bishop Desmond Tutu

Question to an expert: “What are the indicators of the next bubble?”

Response: “The day you stop thinking of this question!”

Incredibly, as the books opened for publication, the Chinese markets crashed! The 300% Instant Gains on China IPOs Are Suddenly Vanishing

I am sure that Amitji will include an account and analysis of this story in the second edition of this book.

The book is as enjoyable as it is enlightening. I strongly recommend it.

Buy it from Amazon. Hard Cover Rs. 450.0 Kindle: Rs 279.3 (not an affiliate link)

You can follow the author at the book’s website: RIDING THE ROLLER COASTER