Recent developments in India, which many across the globe have also consumed with interest, were the outcome of a leading business house in India being singled out for practices that apparently subverted ethical business practices. This, according to the accuser, was based on a two-year research, something even the investors who have invested in this business house would not have done! The business house, in their retort, which was a 400 paged document, tried to dispel the aspersions cast, but to little avail.
With this event as the backdrop, our objective is not to justify or condemn, but to ingrain the many lessons that can be learnt.
(1) Build solid practices: Investments, just like business, must be built on solid foundations and principles. Both are for the long term. To illustrate this further, let me remind you of a little fable we are familiar with. I had used this recently at a series of events that were aimed at educating primary school kids on the principles of investment. The fable is about three little pigs. Their mother sends them out into the world to fend for themselves. So the three pigs (they are not so little anymore) go their separate ways and frame their choices respectively. Pig #1, is an easy-going fella, always chilling out. He builds for himself, the acclaimed, and easy-to-build “Palace of Straw”. And, while he lays back in the comfort of his straw couch reflecting on the ease of life and his achievements, along comes Mr Sly Wolf. We know what happens as Mr. Wolf threatens, huffs and puffs and eventually blows apart the straw palace. Running for his life, Pig #1, dashes into the house of his second brother, Pig #2, who has just settled into his new abode “The Stick Mansion”. Between sharp gasps for breath, he explains all that has happened and the possibility of Mr. Sly Wolf pursuing him to the Mansion. Pig #2, while reassuring his brother mentioned that they were safe, readied two tall glasses of fruit wine. No sooner had they clinked their glasses, did they hear a sharp, noisy rap on the main door. Sensing danger, they peeped out, only to find that their greatest fear had come true. The big bad wolf was at the door. He threatens them, they refuse to accede and finally after a prolonged effort, he reduces the Mansion to rubble! Lost, worried, confused and fearing for their lives, they run as fast as possible to their last refuge – Pig #3. He lived a little distance away, in a picturesque setting, in what folks in that part of town called “The Refuge”. Townsfolk, who the running brethren had met, directed them to this solid, brick structure. Fresh from his walk in the hills, the lilting aroma of freshly brewed coffee wafting around, Pig #3 was just raising his cuppa to his lips when he was jolted by the panicked shrieks of what sounded like his brothers. Rushing to the door, he welcomed them in and as they filled him on the events thus far, his expression turned from one of worry to one of calmness as he poured out a cup of the brew for each of them. As their taste buds danced to the flavour and they smacked their lips, the loud, angry, irritated, hoarse growl of Mr. Wolf shattered their brief moment of joy. He threatened them wildly, all the more driven by greedy thoughts of an unexpectedly large lunch of 3 sets of pork ribs! Pig #3 challenged Mr. Wolf to try all his tricks. And when all his huffing and puffing failed, the wolf climbed to the roof to slide down the chimney. Pig #3 noticing this, lit up a huge fire and Mr. Sly Fox Wolf ended up as the first “foxed” barbeque!
Lessons :
It takes time and effort to build up a sound investment plan. Quick fixes like the Straw Palace or the Stick Mansion will crumble in the face of economic challenges and upheavals. Easy solutions are not always the best.
Research is important. Seek out the most optimal investment plan consistent with your goals.
Invest for investing’s sake. Investing is a steady, consistent process of deploying your money. That is the seed. Planted well and nurtured well it grows to become a tree. Every tree began as a seed!
Finally, a well-structured investment plan can help turn an adversity into an opportunity. The conclusion of the fable best describes this. A threat becomes an opportunity of profit.
(2) “Leveraging” Risk: The introductory issue on which this piece is based had one research finding that stands out – LEVERAGE. And this is something that the research proves as excessive. Leverage in investment is simply extracting more value than the fair value of a product. Alternatively, it is also as simple as borrowing to invest. The business house in question, according to the report, mentions that the promoters, using means that were not acceptable, jacked up prices of their stock artificially, and then took out a loan against their holdings. The implication of this was lending houses lent at valuations that were unjustifiable, exposing themselves and the borrowers to a risk of default in the case of a meltdown.
Let us for a moment consider the individual, retail investors such as ourselves, who may have bought into the stocks of this business house as the prices of the stocks soared. An esoteric price rise, dreams of becoming a “richy rich” engulf us . We mark a lien on out other good assets, pledge them and borrow money to deploy here, lured by greed, quite like the wolf who dreamt of 3 sets of pork ribs, only be barbecued a while later. This is the danger of leverage. In this case, we are barbequed when the wolf comes by. It could be a report, it could be an event or a series of events or any other geo-political event that accosts us in the guise of a wolf. Never borrow to invest, and never ever over-leverage when you invest.
(3) Shadow “Foxing”: You read this right. It is not the printer’s devil or an overlooked spelling error, but willfully written thus. Let me try and illustrate this with a fable: A fox who was roaming about on the plains when the sun was getting low in the sky was much impressed by the size of his shadow, and said to himself, “I had no idea I was so big. Fancy my being afraid of a lion! Why, I, not he, ought to be king of the beasts.”
Heedless of danger, he strutted about as if there could be no doubt at all about it. Just then a lion sprang upon him and began to devour him. “Alas,” he cried, “had I not lost sight of the facts, I shouldn’t have been ruined by my fancies.” This is what I term shadow foxing. Investments and businesses built must be consistently reviewed. Is my perception right or is the skew ( either way) being caused by the “setting sun“? The three pigs were an easy meal on any day for the wolf, but it turned out contrary to expectations. The fox that was devoured by the lion, in the fable above, could have lived another day if only he realized that his disproportionate shadow was just the play of the sun and not a true reflection of his size. Our investments are to be reviewed in proportion to the size of our deployments and the tenure. Disproportionate dimensions are to be scrutinized with care, to safeguard our investments from being shadow foxed!
Adhering to these rules aids us in the long stead, else, just as in the fable of the boy and wolf, there would be no help available, despite CRYING WOLF!
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