Wednesday, January 14, 2009

Thinking before acting

My blogs would state to you the obvious, that we are all influenced by hype and advertising. What I am going to tell you more that we are influenced to the extent that it becomes a question of our survival. It is instinctual tendency of an animal to listen to most loud sound and look towards it . Once we find that out , we start rationalizing the fact that since the sound is the loudest , it definately makes a logical sense that what it is trying to tell us must be true. Since the loudness of the sound dims our capability to reason well, we tend to assume that whatever someone is telling us is correct

If you do not believe that humans dont think much before taking an action please look around . Look at the drivers on the roads who are driving smart computer controlled cars. These cars are supposed to be safe and intelligent by providing the driver with maximum amout of control but it is not the car but the human sitting on the steering that is careless. In one of the shows in discovery channel , the narrator informed that the more safe cars are becoming , the more recless drivers are .

In normal circumstance, if you stop a driver and ask him , if it is good to drive safe, the answer would be definately in positive. But the same driver when he gets hold of the car starts behaving in exactly opposite way.

That brings us to the question , how are we different from animals. We have almost all the instincts of animals such as Fear , greed, hunger, thirst etc etc. In the evolution of the mankind , our body has evolved to perform complex mind functions such as solving puzzles, holding a cutting knife in right position , flying a plane and many others . However, we are not able to let go of the instincts that we brought upon our transformation of the animal world. Everywhere in the world finance, wars ,sports , we see that all these factors come into picture. They help us survive in the competition for food, mates and shelter. But there is one more thing that we have more than all animals , which is our thinking . We as a fairly evolved beings can think before we act. Unfortunately that is not very easy. We are conditioned by our environment to suppress our thinking . We also look to our past to prepare our future responses , which is okay when it comes to iproving your behaviour such asbeing more polite or be diplomatic however is not useful when it causes us not to take good amount of risk to get a higher reward . For e.g. if a father beats up a child for no reson regularly , the child will not come to father for even simple requests.

Our thinking before acting may sometimes acts a best response. There are times when we want to do damage, beat someone or say nasty things for a moment, we pause . This gives our brain time to think and the damage is not done. It is quite possible that the response we have is not the best response. We would like to inflict some harm on the opponent and that may be needed. But think of the other consequences that would have arised out of it . So we have chosen a response we have decided as mature adult and not as enraged person. We can even frame anassertive response , which can rightly affect our opponent.

There are a lot of practical applications of thinking and making an informed decision based on whatever information we have and not at the spur of the moment. It can save us with lot of hassles later on.

Tuesday, January 6, 2009

Everyone forgot the risks

One common complaint I am hearing these days is that banks are not reducing the home loan rates even if there is sufficient liquidity in the market . People are complaining that banks have their cakes and are eating them too. A normal borrower like you and me are trapped by all these techniques applied by the banks .

My response is ' easy to blame the banks and everyone other than yourself'.

I have my reasons to believe in the above statement .

1. We all fell for hype. In the national dailies , in 2008 , there were a plenty of advertisement by real estate builder promising us heaven while bankers were eager to put the ladder on. Money was easy and hence rates were down . It was much easier to factor all the cost into our salary. There was not a single reason not to take a loan. Add to the cacophony , we had people whom we knew were profiting from the bubble of the real estate and it was hard imagining why we were not profiting

2. We all want to become rich before we die: That is a fair assumption . It is very difficult to every day go to office, listen to abusive boss and work for a paltry salary. So there must be some easy way. Now since there was so much hype around , we were fooled into thinking that it is our road to riches. According to one news item I read in 'financial express' , most of the rich become rich not because they are brilliant or master strategists but because they take excessive leverage. And if their business venture becomes successful, they are hailed in the eyes of the world. This story raises an interesting point that given similar circumstances, is it possible that cautious general public would also take excessive leverage to get rich even though there is no fallback when something goes wrong. In my observation , yes they can if they could. I have heard and read a number of stories where people have gone into excessive leverage to invest in stocks or real estate before they went bust.

3. We forgot about the risks : There are a plenty of risk when you make a business investment. Even a safe instrument called fixed deposit have strong risk from high inflation and busting of bank. If tomorrow the bank goes down a la Lehman , then it will take all our deposit with us . A risky investment is stock market , where it is not even possible to count the number of risks you can see . A real estate investment is considered a risk free investment as at least you have the land / flat / house with you even though the value goes down.

In my opinion that is the biggest mistake our Indian masses do . A real estate investment that is based on good location of the property can fetch handsome rewards. Other ways that real estate can work to our advantage is the fact that it is a commercial / residential development that provides us with a constant revenue stream in the form of a rent. There is some tax benefit that we derive out of our investment . However risks are plenty.

  • There could be oversupply of the real estate leading to a drastic fall
  • The whole area is now not considered suitable for investment
  • The property taxes have made running businesses difficult
  • The inflation is rising too fast and it is making maintenance and repair beyond reach and many .
  • The loan rates have climbed too high mostly out of our reach.

I am not a real estate expert but all I can say is that even this asset class has its set of risks and the public either failed to see them or they were misled into believing that it is not risky at all.

4. We forgot to read the fine print : You assume that you are customer of the bank and the bank would follow generally good practice .You assume many things on bank's behalf. But on the other side, your bank is not assuming everything. They are making sure that they leave nothing to chance while the only risk they bear is when the price of property goes below the loan amount( they would squeeze you on that ) , floating rate gets higher ( they would squeeze you on this too), you default for a month ( be prepared for onslaught). Obviously , they have done their homework while you in your dreams have even not cared to read what they have written in the document that you are going to sign . In this case , all mistake is yours .

5. Our experiences fail to teach us : My bank raised the credit card rate of interest on the account of a flimsy reason that many customers of theirs are defaulting . It means that they penalized me for the fault of others . It never occurred to them that I have been paying my dues on time and there is absolutely no risk doing business with me .

But this experience taught me one thing "Bankers are not our friends, they do not like us , they do not love us ". They are here only because they need money to run their business and they deal with us because we help them make money. I reduced my credit card balance to zero, immediately dropped my plans of unnecessary expenditure and used cash for most of my transactions . This has helped me to use the facility provided ( a credit card ) without falling into the trap they want me to get into. I have my credit limit to 50,000 and never exceeds it even though it might mean giving up on things I desire badly.

Now back to general public. I feel that everyone had one or the other kind of experience with the banks. But that did not deter people from taking huge loans . The higher the loan , the higher the risk of default . A bank is where you keep money so that it does not get stolen while you may take a loan based on your capacity and risk appetite. I do not think a bank is useful to me more than that.

Now if you are trapped in such a scene, how would you come out of it .

1. If you are over leveraged, try to reduce the debt either by borrowing from friends and family . Remember , they understand you better than any other smiling bank salesman
2. Cut on your credit card expenses because they take a lot of money to repay
3. Do not fall for marketing gimmicks of the banks and industry. One of my way to avoid my mind getting fooled by the marketing is to add one line 'Now give me your money' after every advertisement . That would be a reality check.
4. Do not buy a thing if you don't have to buy it . Do not buy if everyone says it is good . If everyone knows about it then probably it is already overpriced
5. Learn to read between the lines especially in agreements . If you are not sure take help from someone who knows about it .
6. Don't let your emotions run through . Look for the risks , hidden agendas, ambiguous lines. Ask if you don't understand.
7. In Hindi we say 'Bhag kar kahi nahin jaa raha hain ' . You cannot turn everything into a winning opportunity. There are some lost calls too . Just wait and think before you decide to act.
7. Last but not the least . Avoid taking loan at all cost . Try building assets instead for e.g. . stocks which appreciate with time . They would provide you more stability that leverage.

I hope all these make sense to the public and people become more conscious before they take a decision.