Budget Trends

2 important factors to consider before any critique of this budget are:

  1. Govt. didn’t have resources for stimulus;
  2. Tax Cut stimulus doesn’t’ work as far as history is concerned

In the context the budget has been an exercise in balancing the priorities without over-stretching the books.

Here are some important numbers:

Fiscal Deficit4.5%4.3%Including off-budget items @0.70% for FY-20 and 0.80% for FY-21
Net tax Receipts15,04,58716,35,909Modest 8.73% increase assumed
Non-tax Receipt427,117609,98443% increase in non-tax receipt primarily coming from disinvestment (going by 3-times) On back of LIC IPO (At a valuation of INR 8 Lakh crore), LIC IPO can yield 80K Crore to the govtAlso budgeted 1.3L Crore from sale of spectrum-seems ambitious; Cause of concern and potentially can leave a hold in govt finances 
Borrowing(Lakh Crore)498972535870Only a 7.9% increase in borrowing which might provide an upside risk given the heavy dependence on divestment and spectrum sale to fund the deficit
Rural Spend(Lakh Crore)1.882.41Increase of 28% in rural spend-ensures priorities in the right place


Focus on Bottom of the Pyramid-Increased spend here will potentially improve rural consumption RuralBig focus with a 28% increase across, except for MGNREGA, where spend has been cut by 13%;Increased spend for PM Kisan Samman Yojana shows that the Govt. is looking to broaden the scope of coverage;Other initiatives like solar power on barren land might take time, however are good steps towards increasing rural income;Education & Job CreationBig increase in primary education using Eklayva model; Focus on Entrepreneurship; budget down on skill development and job creation HealthcareAnother focus area with large increase in spending especially Ayushman Bharat where budget has gone up by 94% 
TaxationGovt. expects to add 40K crore to consumption through the changesBig Message-get ready for a world without exemptions;Makes the tax structure simpler, however targeted savings for retirement and long-term goals sacrificed;These savings contribute a large pool to the Govt as resources as well as helping the govt. avoid creation of social security schemes;It might set dangerous situation going forward and hence govt must look at encouraging long-term savings while taking away exemption/deductions like HRA; LTA etc.,
Sectoral Power SectorIn a Jam for long, needed urgent intervention; Govt. has finally taken cognizance, without admitting failure of UDAY; Lot will depend upon execution to reduce dues and indebtedness in the sector and strengthen players across thermal and renewable sector; AIF structure especially given the tax incentive for the sovereign funds could go a long way in solving the current mess InfrastructureGovt. looking for a helping hand, hence tax exemption for sovereign funds ConsumptionNo big-bang, incremental and in-direct;   Expect consumption trends to continue, no big changes Consumer durables especially AC that was doing well to be hurt by increased duties expectedMake-in-IndiaAnother shot at make in India in form of assemble in India;Increase in duties to encourage local manufacturing;aaHas not worked in the past 


The trend of market chasing growth basis liquidity to continue

Trend of private players whether banks; insurers or NBFC’s taking away market share from public sector will keep the prominent players in the market a focus

Rural being a focus, rural/semi-urban focused financial services players to continue to be in focus

Also improvement in rural income should provide impetus to the Auto/consumer durables and consumer sectors to be in play thanks to the aspirational and emerging class 

Markets will provide value with some more correction especially some of the larger names in financials; auto and FMCG correcting;

Investors should take advantage


The govt. did the right thing by not stretching itself too much;

Overall Another incremental budget that doesn’t cross the major T’s and dots the I’s, however stays prudent on fiscal, which was highly necessary given the low correlation between tax-cut based consumption expectations

However big bang reforms like land and labour reforms were not mentioned which could have given a cheer from an intent perspective;

No further intervention declared for liquidity and real-estate sector which is probably an important element to kick-start consumption will be missed

Manish Verma

Keynesian or Monetarist-What should the India FM be?

Stimulate the economy

Put more money in hands of consumer,

Unleash the animal spirits

Cut the personal income tax rates, Cut GST, cut capital gains tax, Cut dividend distribution tax

Increase infrastructure spending

We want the moon, the sun and the sky???

How will we pay for all this-divest, expand tax base, increase tax buoyancy????

The real question is does it really help.

Lets look at some numbers:

FYIncome Tax SlabTax Collection (INR Cr.)Increase in tax collection (%)GDP Growth Rate (%)Direct Tax to GDP Ratio (%)No. Of Individual+HuF  Income Tax AssessesNo. Of Assess growth Rate (%)
Above 150K-30%
 31,764 7.703.25
2001-02Same as above 32,004 0.76%8.503.03
2002-03Same as above 36,866 15.19%7.763.38
2003-04Same as above 41,386 12.26%12.063.81
2004-05Same as above 49,268 19.05%17.704.1
Above 250K-30%
 63,689 29.27%13.924.47
Above 250K-30%
 85,623 34.44%16.285.36
Above 250K-30%
 1,20,429 40.65%16.126.3
Above 500K-30%
 1,20,034 -0.33%12.895.93
Above 500K-30%
 1,32,833 10.66%14.695.85
Above 800K-30%
 1,46,258 10.11%18.845.81
Above 800K-30%
 1,70,181 16.36%17.405.48
Above 1000K-30%
 2,01,840 18.60%12.255.53 2,96,06,986 
Above 1000K-30%
 2,42,888 20.34%12.285.62 3,13,71,241 5.96%
2014-15250-500K-10%; 500k-1000K-20%;  
Above 1000K-30%
 2,65,772 9.42%10.455.55 3,32,75,233 6.07%
2015-16250-500K-10%; 500k-1000K-20%;  
Above 1000K-30%
 2,87,637 8.23%8.255.47 3,70,79,448 11.43%
2016-17250-500K-10%; 500k-1000K-20%;  
Above 1000K-30%
 3,49,503 21.51%13.235.6 4,26,01,569 14.89%
2017-18250-500K-5%; 500k-1000K-20%;  
Above 1000K-30%
 4,19,884 20.14%11.28 5,21,04,008 22.31%
2018-19250-500K-5%; 500k-1000K-20%;  
Above 1000K-30%
 4,73,121 12.68%11.20 6,07,11,199 16.52%

Here are some interesting highlights:

  1. Tax collection grew in sync with economic growth from 2004-05 onwards and continued till global financial crisis on 2008-09
  2. Tax rate cuts of 2008-09 or 2012-13 or 2013-14 didn’t move the needle on tax collection;
  3. Tax collection to GDP ratio has remained stable throughout with no appreciable charge this way or that

The most recent and big tax rate cut was in United States in 2017.

All it did was increase deficit while not having any incremental impact on the growth or job creation.

GDP growth was expected to cross 3% consistently, however it’s has averaged barely 2.4%

Job growth has been at the same rate as pre-tax rate cut;

It was contended that individual tax payers will gain USD 4000 PA, however that has not panned out. It was later claimed that hourly wages have increased, however hourly wages are stuck at 3.3% and will have to rise to 7.8% to get an increase of USD 4000.

US corporations spent only 20% of increased revenue gained thanks to tax cut on capital expenditure (as trade war weighted heavily on corporate sentiments); 80% of increased revenues went to share bust-backs and dividends.

Trade war ensured that manufacturing index has remained below 50 and hence under contraction, thereby ensuring that the positive impact of tax cuts didn’t help the sector.

Why then ask for tax cut?

Most of the demands put forward are self-Centered;

Corporates want consumers to spend at any cost that they don’t have to bear.

After having already get a big tax cut, they believe rate should be reduced further, to stimulate them to invest, even though there is no sign that any of them is planning any major capex in near-to-medium term.

Consumers want more money in their hands to boost their financial situation.

All everyone wants is a quick-fix that will push the stock-markets higher and improve sentiments.

Whether there will be a real impact or not-there is no patience to consider.

Economy is Complex

Any economy is a complex organism.

While the basic idea of any intervention is growth or avoidance of recession.

The tools are limited and need to be used judiciously.

While on one hand managing money supply can be a critical tool to stimulate/curb consumption;

Fiscal policy has to work hand-in-hand with monetary to ensure supply and demand is not disrupted in an opposite direction.

In India the government has been the only stakeholder committing and managing capital expenditure to stimulate the economy in the last 6 years.

RBI has also been cutting interest rates in trying to support govt. efforts.

As the above 2 have not helped growth, everyone is clamouring for personal income tax rate cut. Now if income tax rate are also cut, it will only stimulate inflation (in an already inflationary environment) thereby pushing wages and further putting pressure on job creation.

In the event the government wants to cut tax rate then it will also need to cut spending to ensure that inflation doesn’t go out of hand.

It’s not worked in the Past

The tax cuts of 2008-09 combined with duty cuts, export stimulus and higher govt. spending with increasing global commodity prices created unsustainable inflation India going into double digit.

In 2016, most Economist famously called India going through job-less growth.

Clearly anything that the govt. is planning now has to balance various scenarios.

Ronald Reagen’s famous tax cuts of 1982 had to be rolled back partially within 12-months owing to its onerous impact on inflation and job losses.

However the bigger impact came from the investment made in the 70’s and 80’s on education, research and infrastructure that created the right conditions for growth.

On the other hand the austerity of Bill Clinton administration is credited with growth in the 1990’s by keeping the interest rates low.

Big Picture

The govt.’s budget has to keep in mind the larger picture rather than short-term stock market gains.

Various estimates seem to suggest a loss of INR 100,000 crore to govt’s revenue if personal income tax rate cut creating a 20% hole in the already weak tax base.

How will this be made up?

Will increased consumption make up for loss of revenue?

The past doesn’t seem to hold up for this.

There are no easier options for the FM-however staying the course is the need of the hour.

Social Unrest & Economic Impact

Any Systemic risk displays common characteristics like Complexity, uncertainty, ambiguity and spill-over effects.

Social unrest is clearly systemic, given its potential to ingratiate multiple sectors and create ripple effects.

What’s interesting to understand in this subject is “The Tipping Point”:

Let’s take a critical look at some of the reasons leading to what’s famously knows as the “Arab Spring” (The most prominent social unrest movement of last decade:

  1. Demographics and Employment

With 2/3rd of population under age 30 and double digit un-employment, these countries run by autocrats were sitting ducks for social unrest;

  • Dictatorship & Corruption

Ideologically and morally bankrupt dictators, bereft of creative ideas living under the burden of self-created crony capitalists further aggravated the hopelessness with respect to future

  • Bungled State Response & Contagion Effect

The response of Arab dictators to the mass protests was predictably awful, going from dismissal to panic, from police brutality to piecemeal reform that came too little too late. The wide-spread of the protests that escalated so quickly from Tunisia to Syria, Egypt to Jordan incapacitated the administration further

What started as a stray incident in Tunisia escalated rapidly displaying the best example of the “butterfly effect”? Mehmoud Bouazizi was used to being kicked around, paying bribe to run his little shops and even after the payment, being abused by the police. However on this fateful day in December 2010, something triggered in him making him burn himself when stopped again from running his shop.

This once incident become a trigger that gave voice to disillusioned people across the region.

When a systemic risk manifests into calamity, the ripple effects can cause a dramatic sequence of secondary and tertiary spin-off impacts. They may be felt in a wide range of seemingly divergent social systems, from the economy to the health system, inflicting harm and damage in realms far beyond their own and, in the worst case, can contribute to the collapse of a political system.

It is this complexity that needs to be considered when thinking about social unrest and how it can be avoided. While all of us want a “clear answer”, usually there is no single factor that can be isolated.

The impact on economy can be observed both prior and post the “Unrest”.

Let’s look at some numbers to evaluate this closely:

GDP (Billion $) & GDP Per Capita ($)
 GDP Per Capita43424162417742914179424843283872
 GDP Per Capita20612349266828163226326433653614
 GDP Per Capita2304319166203862223823603243782485523395
 GDP Per Capita36553800405442664423465648304940
 GDP Per Capita1423110151119335517130351045365734643
Inflation & Unemployment (%)
 Unemployment18.818.618.517.719.219.2 NA

Not every country has the same issue-it however is a mix of low growth, high unemployment, high inflation or high growth but un-even wealth distribution as characterised by high unemployment or stress created by high inflation.

Case could be any, however symptoms display economic mismanagement, stifled by undemocratic politico-social structure and lack of freedom.

Even India had its movement in 2011 in the form of Anna Hazare which created the trigger point against “corruption” at the heart of it, but in an environment of slowing growth, rising inflation and unemployment.

The economic growth for several quarters post 2011 movement crashed to its lowest in a decade dropping to 4.3% in 4th quarter of 2012-13.

The recent case of social unrest in Hong Kong has also displayed the larger impact of a prolonged unrest on the economy where economic growth has plunged. The economic growth has plunged into recessionary territory at (-) 3% last quarter, most severe since 2010.

A usual autocratic response is use the heavy-hand of the govt. Apparatus and quash it (Tiananmen Square is the perfect example). However increasingly govt.’s are realizing how it doesn’t help.

Even autocratic countries have had calm periods across decades (whether it’s China [exclude HK for the moment] or Singapore) provided the economic interest of the population is taken care.

Usually lack of co-relation provides nay-sayers the opportunity to deny any kind of causation, however given how complex this phenomenon is, it’s important to differentiate between the ultimate trigger and the variety of reasons that are causing frustration with the system.

What’s Happening Here?

India is currently going through a wave of agitation.

Groups on both side of the spectrum might have justifications; however a close look at opposing groups shows one characteristic that stands out and that’s Age profile of dissenters irrespective their ethnic/religious profile.

Student agitation in India has always found resonance in popular opinion given its diverse and bipartisan nature.

This opposition comes in the wake of multi-year low GDP growth, stagnant per capita income as displayed by the increasing inequality with Top 1% population holding 51.5% of total wealth of the country while bottom 60% of the country hold only 4.8% of the total wealth and Top 9 billionaires holding as much as the bottom 50%.

Unemployment at multi-decade high with low wage growth and shrinking opportunity in an environment of increasing aspirations creates a deadly cocktail.

It is in the interest of the nation that social changes ride on the back of economic growth rather that impeding the same.

As evident from Arab spring, social unrest can accelerate a country towards recession.

While the countries recover sooner than later the social divides can continue to pain the productivity of the nation.

It’s hence prudent that the powers within Central Govt. Make a quick course correction stemming the unrest, reconcile with agitators and initiate measures to spur growth.

Lack of economic well-being can aggravate social unrest for reasons that might otherwise get taken in its strides. When govt.’s try their luck with changes that impact the country in a fundamental way or suppress the voice of the population, hoping for public support, they have to realise that all support comes for a price and easiest way to win support or continue to enjoy your rule is to ensure that the common man has enough opportunity to earn their living.

Manish Verma

A Reason For Everything


On August 1, 1966, after stabbing his mother and his wife to death the night before, Charles Whitman, a former Marine, took rifles and other weapons to the observation deck atop the Main Building tower at the University of Texas at Austin, then opened fire indiscriminately on people on the surrounding campus and streets. Over the next 96 minutes he shot and killed 14 more people (including an unborn child) and injured 31 others.

He had been troubled for years with this urge to kill people prior to him actually doing it. Through a note that he had written prior to going on this killing spree, Whitman requested for his brain to be used for research to figure out “Why he did, What he did”.

The doctors indeed found a tumor in the white matter above his amygdala which was probably the reason causing him the distress.

Human beings have an innate need to be in control, it’s not so much about controlling people as much as it is about their need around control.

We really don’t have to be in control for this, we just need a sense of control and that’s enough.

This sense of control is so evolutionary that we feel is important for us to survive and can create paranoia when its sensed missing.

Look at some of the questions that bother people all the time:

  • Why am I not succeeding?
  • Why is someone else succeeding?
  • Why did a wrong choice happen to me (read carefully: I didn’t make a wrong choice, it happened to me-it’s outside me)?
  • Who is to be blamed?
  • Can I generalize someone’s success or failure to a reason?
  • Why did the markets fall or go up today?
  • Why didn’t I make money?

The list is endless

We need simple explanations for everything so we can make sense out of things?

However Whitman’s story is not about being psycho, it’s not of a person in control-it’s a person losing control?

There could be something physical or physiological; something I can see, or something I understand, even something that I can’t see nor understand.

Does the key lie in being in control or in managing how you feel about control which can achieve far greater actual control.

Risk in behaviour emanate not from what’s predictable but from what’s not predictable?

So all you do is make provisions around what can impact you negatively when a risk arrives whether predictable or unpredictable and then be disciplined about how you run your affairs-whether it’s your business or your personal finance.


The amazing story of Kat Cole (President, Cinnabon) has several important lessons:

  • Raised by her mother with her 2 siblings on an administrative support role salary, she started selling beer and chicken wings at Hooters, her second job, when she was still in high school. 
  • First of her family to go to college, she started working on engineering coursework at the University of North Florida, but dropped out because Hooters was sending her all over the world to open franchise locations.
  • At 19 when she was asked to go to Australia on her first assignment, not only had Cole never been out of the country, she had never been on a plane. Her only trip out of Jacksonville until that point was to Savannah, on a girls trip in high school.
  • Cole was taking in close to $45,000 a year as a Hooters girl when she accepted her first corporate job with the company in Atlanta, which only paid $22,000. The pay cut was worth it to Cole to get her foot in the door. 
  • She rose through the corporate ranks so quickly that that by the time she was 26, Cole was an executive vice president. Mind you, this all is without a bachelor’s degree.
  • Three years ago, Cole, now 35, accepted the role as president of Cinnabon, the sweet-indulgence franchise with 1,100 stores in 56 countries and which is approaching $1 billion in annual sales. 

She took her risks; maybe there was a plan, maybe there wasn’t one;

However the rewards she got were exceptional;

Along-with all the hard-work, competence etc., what’s so important is to take an opportunity, even when it looks inherently risky, is what makes the mix interesting.

Often as investors we raise the question of premium for taking the risk;

The risk premium reflects fundamental judgments we make about how much risk we see in an economy/market and what price we attach to that risk. In the process, it affects the expected return on every risky investment and the value that we estimate for that investment. Consequently, it makes a difference in both how we allocate wealth across different asset classes and which specific assets or securities we invest in each asset class.

That a higher return is expected by investors for a higher risk is highly intuitive.

Technically a lot of work goes around calculating risk premium, creating portfolios, advising clients, etc.,

What we see in practice is how often, investor perception plays the biggest role ignoring all models but listening only to the inner voice driven by “Greed” or “Fear” with an “acceptance/ignorance of the risk”.

This intuitive process cannot be assigned a “Value”.

We see the success of Kat Cole, however she might have gone completely wrong in her choices, is a probability that can’t be ignored.

That just shows how the risk-premium so often is an after-thought and not a design.

More often then not its an effective story playing to the right emotions that gets a decision and not the complicated equations that display favourable “risk-premium” and “risk-reward”.

Our challenge always is to separate the emotions or at-least accept that our emotions and our perception of the factors drive our acceptance/ignorance of risk and hence the premium is only an outcome and not a design of our decision.

Till we can understand, accept and remember this-our acceptance the outcome will have a bright chance. 

Know your RISK

Courtesy Joetheitguy.com

The Poet should Prefer Probable Impossibilities to Improbable Possibilities

Every criminal takes a “Risk” knowing that there are more chances of being caught than not.
It is not the fear of being caught but the confidence of “I will never get caught” that pushes them.
The moment individuals get into a fight mode-they gain this whole “illusion of Control” which makes them believe that they know everything that can happen, can go-wrong and just go with their plan even though there are always events/happenstance beyond one’s control that can surprise “the best laid plans”.

In the famous 2001 paper on “Illusion of Control”, the authors Francesca Gino cites how pedestrians in NewYork city continue to believe that by pressing the walk button nears light signals, they can make the “walk” signal appears faster when the whole system, is computerised and none can control it.

Individuals are often thought in “self-help/motivational” programs that when the choice is “Flight/Fright/Fight, they should fight.
When we all know that “FIGHT” is not a game plan-its just a positive feeling.
Positive feelings about ability to succeed are very important, however you need much more to succeed than just a positive feeling.

Success has so many ingredients-
so on and so forth.

Even in this limited list it is easier to Notice how few things we control.
While knowledge can be controlled, competence can’t be.
Discipline and patience are virtuous not everyone possess.
And “Opportunity” is just pure chance.

The story of Phil Hellmuth (A record 15 time world poker champion) is legendary.
Phil was known for his temperamental personality as even mentioned by his Wikipedia page.
His break-downs are available on youtube with several million views.
How then did he manage to win 15 championships in a game of pure chance.
This is the story of “discipline and behaviour control”.
The biggest factor in his success is “how he has chosen to play fewer hands -Top 10 hands only in the initial stage.
He avoids risking his entire pot at the early stage of the game

For someone who is legendary for being temperamental, the discipline in his game is a complete contradiction.
However when you are there to win, you need to play the game, you need a strategy and you need to be in the game.
No-one has won by being out of the game ever.

Risk in Investing

This gets so easily co-related to how investment decisions are taken that one feels “why am I not following it”.
In a recent interaction with the client, the crux of the discussion was “take risk-however before you do that, know your risk”.
The biggest challenge faced by individual investors can be easily summed up below:

1) Stay out to long;
2) Get in the market in “FIGHT MODE”;
3) Keep putting “good money behind Bad” in hope of recovering what’s lost

These are nothing but issues of
1) Knowledge;
2) Competence;
3) Discipline;
4) Patience;
5) Opportunity

When the market suddenly runs-up, everyone preaches “how one should have invested and should remain invested” because that’s the only way to make money, it is still driving “long-term behaviour” using short-term phenomenon.

It is always difficult to teach patience, discipline and making the opportunity rather than waiting for it or jumping at the opportunity that’s already passed (looking at past great returns to make today’s investing decisions).

It is difficult to teach patience and discipline when the advisor is “chasing short-term rewards” not aligned with “investor interest”.

Steps for the Investor to be “Disciplined” and “Control of Behaviour” :
1) Know the Risk;
2) Know your Risk-tolerance;
3) Appoint an Advisor and “Develop an Understanding that you can review”
4) Have a PLAN-Define your investment goals;
5) Define and stick to your asset-allocation;
6) Keep investing in a discipline manner-Systematic Investment Plan is a great way of discipline investing;
7) Draw money from investments per your plan;
8) Don’t be “driven by FEAR/GREED Factor;



According to a recent NewYork Times report-the fire warning system at Notre-Dame took dozens of experts six years to put together, and in the end involved thousands of pages of diagrams, maps, spreadsheets and contracts, according to archival documents found in a suburban Paris library by the Times.

The result-a system so complicated that when it was called upon to do the one thing that mattered-warn “fire!” and say where-it produced instead a nearly indecipherable message.

Perfectionism is a kind of “Ego” state for most of us.

Realisation of own competence is an even bigger challenge.

It is not necessary to create a masterpiece to be a master.

However the urge to display “competence” and be commended as a master is a need that complicates human thinking.

For majority of investors discipline of saving, simple thought process, even simpler asset-allocation and the simplest of product solutions are enough to meet their financial goals.

However instead everyday we see the following play-out:

  1. Mortgage backed securities;
  2. Collateralised mortgage obligations
  3. Collateralised debt obligations
  4. Asset backed securities

So on and so forth.

In the name of capital protections; hedging; higher yields, life is made complicated on a regular basis.

Most of the time these products end in the hands of investors who have no recognition of what they are getting into and there is no appreciation of underlying risk.

What are the drivers of this product selection:

  • I bought something unique-I am “SMART”
  • The “In-THING”
  • “GREED”

Actual Results:

Here is a chart that’s really revealing:

In-fact in 2008, Warren Buffet had put in a wager that over a 10 years net of fees hedge funds shall under-perform index funds.

Lo & behold, 2008-2016, hedge fund returned an average of 22% against 85% for the s&p500.

Closer home all categories of exotic funds-real-estate structures; REIT, hedge funds have not only not been able to justify the high fee and are in-fact illiquid to the extent that investors have been waiting for exits for years.

Lot of funds have extended tenure with one fund even transferring illiquid securities to investors personal DMAT account to close their fund.

While I can go on, lessons for general investors are simple:

  1. Create a plan;
  2. Have clear goals;
  3. Recognise your risk-profile;
  4. Save regularly with discipline and invest as per your asset allocation
  5. Find simpler product instead of being driven by what’s in or exotic;

Begin With Self

“Understanding is deeper than Knowledge;

There are Many People who know you but very few who understand YOU”


I will add to the quote “not only very few people, but even you don’t understand yourself”.

Author Timothy Wilson in his sublime work “Stranger to ourselves” writes about the Temple of Apollo in Delphi, where almost two thousand years ago was written the maxim “Know thyself”.

One of the most powerful but underscored truth of all times.

It was left to Sigmund Freud to tell us that most of our mind operates unconsciously making it difficult to know ourselves.

There were several thinkers way beyond Freud who had talked about how a lot of our thinking is not only automatic but way beyond the realms of rationality as there are so many things that we just do despite what we think about them.

Explaining this complex phenomenon Mr. Wilson explains how our 5 sense take-in over 11,000,000 pieces of information per second with an ability to process only around 40 of them;

So where does the rest go.

The rest of it goes down the drain, hidden in our adaptive consciousness

From where it tends to influence our judgements, feelings and behaviour.

David Mcraney says in “You are not so smart” that:

“You are often ignorant of your motivations and create fictional narratives to explain your decisions, emotions, and history without realizing it.”

Our mind tells us stories to justify the reason for our actions.

So much of this becomes automatically applicable to the field of “investing” even without being expressed in as many words.

There is a process, a critical part of many a investment profiling questionnaires that talks about “Risk-profiling” which can be used to advice suitable asset-classes and products to investors.

More-often than not we find risk-profiling work very well till the time “everything is positive”;

The moment its negative compared to an alternate scenario, “risk-profiling” fails miserably.

They are nothing better than a journalist on TV telling us “Why did the market fall today”; or “Why would it go up tomorrow”.

The crucial question at this stage is how to use this information whether you are an “investor” or an “advisor”.

Viktor Frangel said “As long you have a goal, you can recover from anything”.

This is important. Till the time we can divest a situation from the “emotional power” that it has on us, we can overcome the effects of the same.

This is what I suggest:

  1. Set a process for each decision; especially important for the advisors;
  2. Understand “what you are trying to achieve” through a decision-Have a “GOAL”;
  3. Document the rationale for accepting or rejecting a decision;
  4. Review your decision periodically against the rationale and till the time the rationale stands



The Ownership Choice-II

 “We can’t control our greed”;

“You need to regulate us more”

This is what the CEO of a big bank told Henry Paulson-US Treasury Secretary in 2008.

Dopamine, both a hormone and a neurotransmitter, is used by the brain to send signals to other nerve cells.

While it has several uses, its most publicised impact, has been found in reward-motivated behaviour.

Any anticipation of reward increases the level of dopamine in the body.

Whether its Drugs like cocaine or physical Pleasure through sex, they have the same impact on the nerve system.

The interesting thing however is that the same activity doesn’t increase the dopamine the next time, and that’s where a lot of “rewards systems” tend to fail.

The anticipated outcome (read: reward) determines the acceptance or rejection of the reward induced motivation.

Unless the reward increases/alters substantially, dopamine levels don’t change dramatically, thereby determining the outcome of a motivator.

A study done by Henry W. Chase and Luke Clark, presents another interesting aspect that turns, the whole dopamine theory on its head.

Among Roulette players, dopamine levels increased, not only when the won a big stake but also when they had a near miss, prompting them to play the game again.

The other interesting, but underplayed outcome, that dopamine has as a neurotransmitter is its ability to help avoid “unpleasant experiences”.

Most of the financial advisors can by now relate to this basis their interaction with the clients.

There are 2-prominent categories that you always encounter:

The client who tells you, “I am ready to take RISK, but I want high returns”;

And the other that tells you “I am happy with low returns till the time my capital is safe”

Now as a Wealth Manager, you can use “Dopamine” very effectively by catering to the clients’ nerves by “telling them what they want to hear”;

That can be counter-productive as it might get an initial sale; however the low once the effect of “Dopamine” recedes will risk your relationship;

The important lesson is to use the tool with a defence mechanism that helps reduce the impact of the fall.

As a “Client”, this is even more interesting as most individuals find it difficult to control their impulses when “Dopamine” kicks;

Remember “Cocaine” and “High returns” potentially have the same effect.

The recommendation always is to have your own process; For example

  • Questions to be asked on any proposal;
  • Documenting the theory for agreeing as well as rejecting a proposal;
  • Sleeping-over a proposal before taking a decision either-ways

The proposition might still be compelling;

However at-least you have something to refer to before you make a choice and then you can own that choice.

The Ownership Choice


23 Jews were killed in Iran on Asura day in 1839 only because some people thought a Jewish women washing her hands in a dogs blood to cure herself of skin disease was making fun of the martyrdom of Husyn. The idea of Asura is to commemorate the sacrifice of Husyn and is definitely not sacrificing others.

Yual Noah Harari describes this in his book as a matter of choice:

When you inflict sufferings on others

“Either the story is true or I am a cruel villain”

Similarly when I inflict suffering on my self, there is a choice:

“Either the story is true or I am a fool”

As human beings don’t like to admit themselves as either fools or villain, they choose to believe that their story is true.

Most of the human life decisions can be slotted in these 2 boxes.

As Yual describes elsewhere in his book, if you buy a second hand fiat for 2000USD and it breaks down, you can just junk it but if you a Ferrari for 200,000 USD you need to go around talking about it to justify your decision.

Financial advisors and fund managers definitely relate to this.

Clients will come down hard when an advisor/fund manager decision goes wrong leading to under-performance, even if its in the short-run.

However when they have personally bought a stock, they are not just happy to stick to the decision, even though they lost money in the short-run, but are even willing to expand their holding.

How engaged one is to the decision thus impacts how an individual will react to the downside of the decision.

In behavioral science this is know as choice-supportive bias.

Individuals tend to downplay the faults of the choice that they make versus ascribing new negative faults to the option that they ignored.

There are important lesson for advisors as well as investors here:

  1. Risk is part of the risk-reward payoff whosoever makes the decision; just because the payoff was calculated doesn’t mean-risk is taken care of; 
  2. Risk is not only real-it plays off at some point in time-you got to prepare yourself for that.
  3. The key is engagement with the decision, which means:
  4. Did I understand the product, process, philosophy, 
  5. The inherent risks related to where I am in the market/economy/earnings cycle; 
  6. Am I just driven by short-term performance ignoring the short-term pain
  7. Pain is part of Patience-since 1914 when Dow was 66 points, the world has seen 2 world wars; 4-5 major recessions including 1929; 1997; 2008; 9/11, US war on terror etc., but still Dow has gone to 26000 points;

If you can be as patient with your Fund Manager as you are with your own decisions, your patience will pay-off

  • Essential is to have a written thesis prior to investing; unless that thesis has changed adversely, you need not change your path-whether managed by an FM or yourself

Own Your Decision & Just Stay the Course