Wednesday 6 November 2013

Greed for Safety!

Paradoxical Oxymoron: Greed for Safety

Just came across a brief but insightful interview with Seth Masters of Bernstein Global Wealth Management:

Traditionally, people have been accused of losing their money due to their greed. When I read the above interview, I was able to recall a rather interesting trend that I've consistently observed among the famous Indian Middle Class, which gets accentuated after every scam / bubble (ranging from Harshad Mehta scam to Dot-com bust to Ketan Parikh scam to East Asian currency crisis to the US Sub-prime Mortgage crisis to the Euromess to the Chinese slowdown to the NSEL Scam):

  • In the name of running after safety, the middle class Indians tend to focus too much on the risks associated with equity shares and too little with a rather critical risk.

  • Interestingly, this risk aversion that prevents the middle class Indians from investing in equity shares is at its highest when the indices are at their lowest valuations due to one scam or burst bubble or whatever. Hence, they tend to completely stay away from investing in shares when the BSE Sensex is at 9000-10000 in 2008, but much more willing to get tempted to invest in equity shares when the share prices have gone up consistently for 3-4 years, as it happened between 2003 and 2007. But then, this post is not about the foolish behaviour of investors when it comes to investing in shares.

  • Instead, I'd like to highlight the foolish behaviour of the very same investors in an entirely different arena - their Greed for Safety!

Many middle class Indians tend to look for SAFETY and LIQUIDITY when it comes to investing their "hard-earned money". This often means that they look to focus almost exclusively on bank fixed deposits.

Let's look what kind of risks gets ignored in this process:

  • Risk of Inflation - The government publishes an inflation figure - unfortunately, that happens to be the "wholesale inflation", which is of no consequence to you and me. What matters to us is the inflation at the retail level. In the past few years, the retail inflation index would have been going up easily at a rate upwards of 10% per annum. The actual figures, equally unfortunately, are unknown to me. What's worse, however, is that the inflation applicable to an individual hosehold is often likely to be driven by their ACTUAL standard of living and not based on the AVERAGE standard of living of the whole Indian population.

  • Translated in layman's terms, what does this imply? Take a look:

    • A "normal" middle class city-dwelling urban Indian has a much higher ACTUAL standard of living compared to the AVERAGE standard of living of the whole Indian population

    • The typical monthly rent / housing loan EMI is often at least thrice higher than the national average

    • The typical monthly grocery basket consists of a whole range of things which are NOT bought at all by the "Average Indian"

    • The typical school fees, medical bills, dining out, entertainment expenses, fruits and vegetable expenses, fuel expenses, etc. of a REAL middle class Indian is much higher than that of the AVERAGE INDIAN.

    • Naturally, the typical retail inflation for the Middle Class Indian is likely to be much higher than what would be the "Average" retail inflation figure.

  • If the Average retail inflation is upwards of 10% per annum, on a very conservative estimate, the ACTUAL retail inflation for the middle class Indian is likely to be upwards of at least 12.5-13% per annum.
  • Considering the fact that typical non-equity investment options of middle class Indians are often restricted to Bank Fixed Deposits, the present rate of return (pre-tax) happens to be around 8-10% per annum. This is woefully inadequate even to cover the inflation figure applicable to you and me, and certainly not enough to generate any meaningful real returns. 

My simple question: If you're so GREEDY about ensuring the SAFETY of your investments, you're ignoring the RISK OF INFLATION. Can you afford it?

I think not.

Start thinking of alternatives. And quickly!



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