Prevention of/Reaction to Financial Crisis

About a week before being elected President, this is what potential candidate Barack Obama told Time magazine in an interview: “We have got a boat with a lot of leak and we need to get it into port. Once we get it into port, once the credit markets are functioning effectively, it is time to get back to the fundamentals of our economy.” The truth is that one of the worst financial crisis of recent times has been because of gross violation of the fundamentals. Giving loans to low- income or sub-prime US households in the hope that they could recover the money on bad debts from the property in the hope that property price would always go up and stay up turned out to be financial hara-kiri. The Times of India reported that the investors could not be protected from one simple and irrefutable principle — if these housing loans turned bad, the instruments based on these loans would lose value, which is, what happened, denting investment portfolios of banks and destroying their capital, inter-bank liquidity and general confidence. In 1999 during the tech stock bubble, many of the hot tech companies had no earnings, little revenue and no long-term track records and without these absolute basics, it was a bubble waiting to be burst, which it did.

Financial education
From an individual’s perspective, there is again a simple and irrefutable fact — a sound practical financial education emphasising on basics as prevention is better than cure. Since everybody has to manage money, a knowledge of accounts, which is known as the language of business, is always an added bonus. The book Rich Dad, Poor Dad says that practical financial intelligence is a synergy of accounting, investing, marketing and law. Each child needs to know the rules — a different set of rules. According to the authors, being rich basically implies being financially independent, which implies that one’s regular income from investment is such that one can survive from that alone and can choose not to work if one wants to. This implies financial freedom for which instant gratification has to be postponed initially. I learnt all this from my father, a chartered accountant. Unfortunately a lot of young people do the other way around in an effort to get rich quick and start lives in debt. For being a good investor, one has to learn how to do financial analysis of company balance sheets along with the qualitative analysis to the extent possible and also have a sound knowledge of technical analysis for investors to enable them to know when to enter and exit. The most intelligent man I met in the stock market was a broker who had a background in merchant navy (most individual brokers are commerce graduates). He told me that he had a position trading system which he had been perfecting over a period of 10 years and was still coached by a mutual fund advisor. Even with all the fancy software in the US, trading has a 95 per cent failure rate and most traders speak against day and to a lesser degree, swing (weekly) trading. Unless one has a very good intuitive sense of the market which very few people have, it would be foolish to trade. There is an old saying that nobody can claim to be an expert on the market including the mutual funds which the current crisis clearly reveals. Today’s computerised era makes it possible for even a layman to maintain systematic financial records for effective follow up. A good basic knowledge of both investment and financial administration is a must.

Avoid greed
Since many people get into financial trouble because of greed, it is interesting to know what the above book says about high consumption spenders: “They get a few bucks in their hands, again the emotion of joy, desire and greed take over. But the joy that it brings is often short-lived, and they soon need more money for more joy, pleasure, comfort and security. They don’t want to lose the big houses, the cars, the high life that money has brought them. They worry about what their friends would say if they lost all their money. Many are emotionally desperate and neurotic, although they look and have more money.” In one of my previous articles, I have mentioned how eight prominent people in the US who were at a peak in their careers in 1923 were nowhere 25 years later — one became bankrupt, two died as penniless fugitives (one pardoned from prison), one went insane, one died insolvent, one was imprisoned and three committed suicide. I do not know the root cause of the problems in all the above cases but there is a book called World Famous Riches to Rags where a lot many other cases are given in detail and much of their fall from grace can be directly attributed to the high consumption lifestyle. A couple of them went bust because they could not control their over-spending wives. Many committed fraud out of blind greed, some could not manage at a higher and a more complex level and some suffered because of trying to operate on a bigger scale which was done for still better status. A majority of them were a case of ‘all covet, all lose’ or ‘those who miss the silver lining are those who opt for the gold’.

My father who turned around a sick company once and had to operate on a shoestring budget for four years says that the problem arises when one starts doing well, the feeling of “having arrived” can go to one’s head and one tends to get extravagant. This could be true both for companies and individuals. The old saying ‘success is never certain, failure is never final’ is true even more now because of the kind of turbulent changes that are expected in the 21st century. Some of the things I learnt from my father about the wisdom of frugality are better expressed in how the world’s most famous and perhaps the best ever investor, Warren Buffet conducts himself. Buffet never travels by private jet, although he owns the world’s largest private jet company. He even drives his own car everywhere and does not have a driver or security people around him. He does not even carry a ‘cell phone’, nor has a computer on his desk. He does not socialize with the high society crowd. He still lives in the same small three-bedroom house in mid-town Omaha that he bought after getting married 50 years ago. He advices young people to stay away from credit cards, to live their life as simple as they are, not to go for a brand name; just wear those things in which they feel comfortable, not to waste their money on unnecessary things and last but not the least to remember that money doesn’t create a man; it is the man who created money.

Even if one were to follow the middle path advocated by the most famous enlightened man in history, Gautama Budhdha, one would be much better off. Unfortunately, many young people learn this the hard way, which is why we have situations like the one where two MBA students were arrested for kidnapping 15-year-old Arjun Verma after suffering a loss of Rs 80 lakh in the stock market, which would not have happened with more balanced thinking. It would not be out of place to mention that Buffet and another great speculator-cum-investor, George Soros are now known as much for their philanthropic activities as for their financial expertise.

Looking beyond money

The root cause of the high-consumption lifestyle is keeping up with the Joneses syndrome and false notion of the role of money and status in determining a person’s worth. Unless that issue is addressed in pragmatic realism instead of giving lectures on values and character sounding as platitudes, it is not likely to be resolved. I read once that Sachin Tendulkar earned eighty times more in endorsements than his contemporary hockey superstar Dhanraj Pillay when both were at their peak, which is only because of the fan following that cricket enjoys. It does not mean that Pillay is a less superstar. Similarly, someone like Govinda may have more commercial success than a brilliant actor like Naseerudin Shah. Even Abhinav Bindra, who was the first individual gold medalist in the Olympics in over a hundred years, will probably earn less in shooting than a good Indian cricketer would do but his achievement is greater in a certain context as the competition in the Olympics is a lot stiffer as a lot many countries participate than in cricket. While attending a function for a school of mentally challenged children abroad, referring to the activities of the school Rahul Dravid had remarked, “These are the real heroes. We are just more visible.” The role that the NSG played in the recent Mumbai terror attack also reveals this but how much paid are these real heroes or the army heroes who protect our lives paid compared to cricketing and bollywood heroes or even corporate executives? There is nothing wrong in wanting to be rich and famous but looking at the element of destiny from a reality perspective, one realizes what can best be summed up by a quote from Einstein: “Not everything that counts can be counted, and not everything that can be counted counts.”

This can be said for other fields as well. In a recent article in the Hindustan Times, journalist Karan Thapar wrote that once upon a time his merchant banker’s wife’s salary was eight times his salary. He may be a very good journalist but if the profession itself does not pay, what can he do? In Vir Sanghvi’s book, Men of Steel, Infosys CEO and MD Nandan Nilekani stated that his success was being at the right place at the right time. He elaborates that there are people who are much brighter and work much harder than him. His wealth is partly a consequence of good timing. Likewise, in his book on Bill Gates, Jonathan Gatlin states that his leaving Harvard for starting Microsoft was largely a matter of timing. On the other hand Leonard Mlodinow has written an entire book on how the element of chance makes less talented people more commercially successful than their talented contemporaries.

Remain motivated

Other prominent people like Shakespeare, Vincent van Gogh, certainly Munshi Premchand were all posthumous successes — a case of bad timing. Some books even state how to remain motivated if you are the wrong person at the wrong time. Even in well-paid industries the dynamics of business — markets, segments, customers, buying behavior and costs — can be drastically different and beyond an individual’s control. One may mention here that the Gita’s message of doing one’s work without being attached to the results is not merely because the Gita says so; it is so because the market profile in any profession is dependent upon tastes and preferences of millions of people apart from other variables which is beyond an individual’s control. So blindly following money as a measure of a person’s worth and running after brands and status can be counterproductive in the long run. Many spiritual books are critical of the role that advertising plays in converting wants onto needs in impressionable minds. It is better to hear it from the horse’s mouth — In 1982, a study entitled Advertise-ment and Social Responsibility indicated that of the total advertisements sampled only 3.3 per cent were factual and informative about the product without any psychological appeal. The appeal becomes more predominant when there is little to differentiate between brands and products in the market.. In such a situation there seems to be no other alternative but to win the consumer support by flattering his or her ego or resorting to a whole range of basic psychological and emotional appeals, including the most primordial ie sex appeal. With so many channels since 1982, I wonder if the situation is any different. What happens when one suffers from a sudden crisis for no fault of his? When a financial
crisis strikes, instead of letting our imagination blowing it out of
proportion, the best thing for coping initially is to think about the
Sometimes money itself can be a source of the kind of crisis mentioned above. About a year back, in Mumbai, a rich Parsi boy was kidnapped and murdered by four of his friends on whom he used to splurge. Some years back, when a builder was killed by extortionists, his wife mentioned how being rich had proved to be a bane in their case.
Filmstar Shah Rukh Khan mentioned in one interview how he was sometimes apprehensive about losing all that he had achieved.. It is perhaps because of the intangibles that both Osho and Krishnamurthy said that people follow security but it is like a mirage because even if one is able to achieve financial freedom, destiny can strike in other spheres of life over which one may not have any control. Severe problems in other intangible spheres — relationships, health and career can be even dicier even if the losses cannot be determined numerically. So the perception that once economic freedom is achieved, all will be well could be deceptive, which is another reason why a blind pursuit of wealth should be avoided.

Facing financial crisis with courage and dignity can prove to be an achievement in itself. In the book Riches to Rags, it is mentioned that Oil baron Glenn McCarthy, though down and out, remained a respectable man and a hero to many people who admired him for his courage, hard work, uprightness and honesty. He faced his destiny with ease and equanimity and never compromised with his principles though driven by destiny from riches to rages. So much so that a book was written and a movie made on him. The railway king of England, George Hudson died a poor man but when his procession passed through the streets of York, the citizens rose to the occasion and gave him a peaceful burial. Sir Clive Sinclair’s phenomenal wealth vanished because of cheaper and better competition but he continued to be treated as an honorable man. All this reminds one of that question one comes across in management books: “What would you liked to be remembered as when you die? What would you want your obituary to say — someone who earned so much money or left a legacy”? The examples clearly show that the world would remember you more for what you achieved and how you conducted yourself than how much wealth you earned or had.
J Krishnamurthy had mentioned in one of his books that pain is physical but suffering is psychological. This is true in the context of ‘perception of reality is more important than reality’ and therefore, how one responds to a crisis is even more critical than the crisis per se. However, as the earlier part of the article clearly shows, one can dig one’s own grave by ignoring certain basics. Whether it is finances or life, perceptions or reality, one thing is certain to avert any kind of crisis which generally has consequences that are mental, one cannot violate any fundamental.