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.”