Credo Capital

Mr Babu, a client of Credo Capital was featured on The Mint, an Financial Newspaper. I think what the client talked about applies to everyone.

http://www.livemint.com/2010/02/04190612/Mum8217s-money-lessons-be.html?atype=tp

The spinning top is a reflection of the economy, it is not supposed to spin that well and that stable but it surprisingly is stable. I think if one thinks about what can go wrong with an economy there are hundreds of things, and it does indeed wobble from time to time as if its going to stop. But just as we assume it will stop soon, as if an invisible hand whipped it again the top starts to spin.  This i guess is what Adam Smith called an invisible hand, the one that ensures that if there is a market for something, the supply follows.  It is not altruism that ensures you get medicine from the nearest chemist or buy that cold drink to refresh on a hot day from the general store but it is their own self interest, indeed if they were not interested in their own welfare there would be no shop and you would be left helpless.

Only Adam Smith would have thought about a statement such as this   “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own self-interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages.”

These words are the basis of capitalism and will forever remain so.

The link below shows a sculpture based on the spinning top, a tribute to Adam Smith,

http://www.spacestationx.com/projector/cp-Pages/Image38.html

Here is a link to my presentation in sify.com on myths about mutual funds.

http://sify.com/finance/Myths-about-mutual-funds-imagegallery-market-jl0sqWfdegf.html

If you have not already, read about the theories of Daniel Kahneman and Amos Tversky. They have together contributed more to how we think about economic choice. Of course they are  not economists but Psychologists.  One of the theories focusing illusion states , when people consider one specific factor that will make them happy – they tend to overweight that factor, while overlooking most factors that may have greater impact. This was the study of the paper ” Does living in California make people happy”? Students from Midwest USA and California reported same levels of satisfaction with their lives but the students in midwest thought that those in California would be happier because they were told that this question will be asked in California too.

The takeaway for investors is that in the markets we tend to focus on one thing say maximizing profits at the cost protecting from losses or vice-versa. The focus magnifies the issue and distorts our thinking.

Welcome to my blog, Money Illusion – People think of money in nominal terms ie what is its face value ( say ten thousand rupees ) rather than what it can buy in real terms.  Fiat Money ( ie money created by governments has no inherent value except as  a medium of exchange) is never nominal but real, ie  as a medium of exchange what it can buy one day to another keeps varying rapidly.  Most economists tell us that people make rational decisions but it is not so. Experiments have shown that people generally perceive a 2% cut in salary  as unfair, but see a 2% rise in salary when  inflation is 4% as fair, despite them being almost rational equivalents.

When researchers asked people whether its better to get 2% raise with 4% inflation or 2% cut in salary with 0% inflation they found easily that both the choices are same but when asked  who would be happier  – they voted that the person who got raise would be !!.

The thing is while your logic understands its the same the brain wants the goddamn raise anyway (emotion) even though reason says its the same.  See : http://scienceblogs.com/cortex/2009/04/money_illusion.php

The point to ponder is when you think about money think of it in real terms and not in its face value, since its face value keeps changing all the time.  About 100 years back 13 Rupees could fetch you 8 grams of gold, today you need 14000 rupees approx.

Whats the takeaway for an investor in this ? when some one tells that invest x rupees every month to get some huge amount after a decade  – think about what it will be worth in real terms after ten years.  Yogi Berra got it right as usual when he said that ” A Nickle isnt worth a dime anymore”