Financial Planning - Keep it Simple, Stupid

Hi Friend,

What the master (read Mr. Warren Buffett) does when he tries to invest in a business in his own words:

"When we look at the future of businesses we look at riskiness as being sort of a go / no-go valve. 

In other words, if we think that we simply don't know what's going to happen in the future, that doesn't mean it's risky for everyone. 

It means we don't know – that it's risky for us. It may not be risky for someone else who understands the business".

But we think it's also nonsense to get into situations – or to try and evaluate situations – where we don't have any conviction to speak of as to what the future is going to look-like. 

I don't think that you can compensate for that by having a higher discount rate and saying, "Well, it's riskier. And I don't really know what's going to happen. Therefore, I'll apply a higher discount rate." -Warren Buffett.

Because he accepts that he doesn't know it, either he puts in effort to improve his knowledge about the business that he is evaluating to buy (by learning from others, by reading or by hiring someone to handle such a situation or by doing all these) or he keeps off the business if he can’t fathom it. 

But, he never buys ten businesses with the “hope” that one will work out as he understands that all the ten businesses that he chose may go bust if he has chosen them wrongly in the first place.


What we ordinary mortals do:

Well, we have perfected the art of pretending.We always try to look in control. 

In the process we try to compensate the lack of knowledge by “diversification” across asset classes like land, gold, fixed income instruments, art, equity (both Indian and abroad) and what not (or try to pretend that we are diversifying across these asset classes though most of the “Indian” assets are concentrated in land / buildings. 

By the way do we Indians understand the risks involved in real estate properly? 

I don’t think we do, otherwise we wouldn’t be investing the kind of sums that we are investing in Real Estate).

Those smart looking financial planners / financial advisers on business media “keep strengthening” our belief in diversification as it serves them well too. 

In a society where looking busy / knowledgeable is more important than being busy with a genuine cause / having knowledge for real is, what option these poor chaps have? 

Moreover we don’t give business to someone who "acts smart" and doesn’t fall in line with our “aspirations”(read - as we wish), do we?

The obvious question that springs to our mind is if it is so easy, why should I pay an adviser? 

We forget the basic fact that it is not easy but is being made easy by the knowledge and skill that one has developed due to an endless effort and hence need to be paid generously.

If we are only willing to pay for an adviser who presents an “elaborate”(read complex and mostly confusing) financial advise, instead of simple advise, then why the hell on earth would an adviser / planner make it simple for us?

One more nugget of wisdom from the master,

“The business schools reward difficult complex behavior more than simple behavior, but simple behavior is more effective.”

Do we like to see ourselves in that “Business school mold” or do we like to see ourselves in the “Buffet / simple mold”?

Let us keep it simple:

Basic frame of a Financial Plan should contain

• Life Insurance: A term insurance policy to take care of a situation where “I” am 'no more' in “My Financial Plan” and 

• A Health Insurance Policy to make sure that a financial plan lasts its intended life span without being chopped midway due an adverse health condition. Buy your own health insurance policy even if you have group cover as group covers are “dependent on your company” and hence are less predictable than our own health policy. 

• Contingency or Emergency Fund that takes care of less probable events like loss of job, bad health and short term needs (the money one needs within 3 years) etc. This money should ideally be in fixed deposits and not in tax saving bonds / instruments as they defeat the basic purpose of a contingency fund i.e. liquidity .Anything beyond this is for the long haul and should be invested where Mr.Buffet invests it i.e. in Equity (through Mutual Funds).

Please don’t forget that a good adviser makes it simple and easy for you to stay the course.

Happy investing.