Thursday, December 16, 2010

Does financial literacy make you wealthy?

Not always. There are factors beyond just financial literacy. Let me explain.

There was a recent report of a study done at University of Pennsylvania that shows that there is a big downside in getting financially intelligent – as per this study, “financial intelligence increases the confidence levels of the investor and it leads to him making worse investing decisions.” In a 2005 survey, 65% Americans believed they were 'very' or 'highly' knowledgeable about personal finance, although they performed abysmally on objective questions about the subject.

I see the same attitude in India as well – most people think that they are financially literate. They confuse between savings and investment – they take investment decisions based on gut feel, optimism and unconfirmed data. They take risks that they are not aware of. With Indian economy growing at 8% for the past 10 years, these  people have had some successful investments – they attribute these successes to their financial intelligence – not knowing that when the times are good, you do not need too much expertise to make money. Warren Buffet opines that you do not need above average intelligence to be a successful investor – however one needs the right temperament – to control the urges that get people into trouble.  A good investor offcourse has financial intelligence – but beyond that, he has the right temperament to wait patiently for the right opportunity and not take undue risks.

As I said in my last blog (and this was popular with my MBA students) – “In the search for good investment opportunities, we must adopt the same attitude one might find appropriate looking for a spouse - it pays to be active, interested and open minded - but it does not pay to be in a hurry.”

Tuesday, December 14, 2010

When the student is ready, the teacher will appear

The content given here was was part of the last class that we had – where in I shared my views that Wealth is not really something physical – it is a way of life - a way of thinking – if you can understand this and then work towards thinking and operating the way the wealthy operate – in time, you will also become wealthy - as wealth will come to you.
People who have wealth use their time to create three things –
1.       A  network of acquaintances
2.       Financial fitness; and
3.       Clarity of their long term goals
As you can see, these three things can be created without having any wealth to start with. Hence anyone of us can become wealthy over time by following these three things – constantly build a network of acquaintances whom you can help grow, prosper; build a mindset wherein over time you end up collecting assets ( anything that increases you cash inflow) and not liabilities (anything that increases you cash outflow); and getting clarity through self education and introspection on your long term goals in each of the role that you play daily ( e.g. role of student, friend, classmate, son/ daughter, brother/ sister etc). As we get better and better in these three areas – we will see wealth coming to us.
Similarly, if one was wealthy and suddenly loses all their wealth due to reasons beyond his/her control, they would bounce back in life and become wealthy again as they still would have their acquaintances, financial fitness and goals.
Over time, I have collected quite a few quotes on wealth management that I shared with the class – I hope that you too enjoy reading these – please read it slowly and think about the message embedded in each quote:
1.       You can’t make a good deal with a bad person.
2.       It is easier to stay out of trouble than to get out of trouble –Warren Buffet
3.       It takes twenty years to build a reputation – and five minutes to lose it.
If you think about that – you will do things differently.
4.       Someone is sitting in the shade today because someone planted a tree a long time ago.
5.       You only have to do a very few things right in your life so long as you do not do too many things wrong.
6.       If you let yourself to be undisciplined on the small things, you will probably be undisciplined on the large things as well.
7.       In the search for good investment opportunities, we must adopt the same attitude one might find appropriate looking for a spouse - it pays to be active, interested and open minded - but it does not pay to be in a hurry.
8.       The most important thing to do if you find yourself in a hole is to stop digging.
9.       If at first you do succeed - quit trying.
10.   What we learn from history is that people do not learn from history.
11.   Saving is not investing
12.   Your work is to discover your work and then with all your heart to give yourself to it
13.   Wealth is far more about focus than talent.
14.   If it feels like hard work, you are already doing the wrong thing.
15.   The rich buy assets. The poor only have expenses. The middle class buys liabilities they think are assets –Robert Kiyosaki
16.   It is what you do with your money after you earn it that makes you rich or poor
17.   Success is not in what you have, but who you are
18.   Money won’t make you happy… but everybody wants to find out for themselves –Zig Ziglar

I have finished this course with this session.  However, I believe that wealth management is not a 30 hour course – it is a lifelong lesson and one needs to learn all the time –hence I intend to add to this blog regularly.