A boy and his mother were walking back home after school. The mother was leading the way and the boy was holding his mum’s hand. It was the day the boy had his English test. The mother expectantly looked at her son, while he was completely lost in thought. Something was clearly troubling him.
She said, “So how did school go today?
The boy said, “We had an English test.”
The mum said, “And how was it?”
He replied, “I think I got everything right except for one question.”
She said, “Oh that is good. What was that one question?”
He said, “What is the past tense of the word, ‘Think’?”
He looked at his mother, hesitated for a minute and said, “I thought, I thought and I thought about it for a long time. And wrote ‘Thunk’.”
In our fast-paced society today, much more emphasis is given to action than thought. But in investing and managing wealth, real actions are far and few. Most people only buy a house once in their lifetime, invest in stocks a few times a year. In such instances, should the emphasis be on action?
Let me take you on a short thought experiment.
How much does finance influence our lives?
Market driven financial solutions solve several of our everyday problems and have done so since time immemorial. Consider the case of medieval Italy. Continuous wars between the Roman empire and its subjects meant that the population of men skewed lower than women (Men usually fought these wars). Fathers of daughters, in an attempt to get their girls married, had to pay large sums of money to the grooms to secure the best match.
But there was just one problem. They usually did not have enough money saved up.
They’d promise to pay a sum to the boy, get the girl married and never really pay it out. On the other end, the city of Florence’s finance was a disaster. Their wars with Milan and Lucca was putting them on the verge of defaulting on their debt. In 1425, the government of Florence introduced a simple scheme that solved everybody’s problem – Fathers’ pay the government a certain sum of money when their girls turn 5 years old, the government compounds that at 11% per annum and pays it out when they get married. The grooms were assured payment and the government’s finances improved! Genius!
Today our large spending needs are met by our future income (inter-temporal income shifting), our risks are transferred and assimilated by third-parties (insurance, swaps), our capital needs for our businesses are fulfilled by millions of individuals (public equity), our agricultural produce is sold in advance of harvest (commodity futures); we rent our home (operating lease), we stash our savings in bank FDs (fixed income securities) and mortgage our properties which are in turn sold to institutional investors (mortgage backed securities). Our everyday life is filled with complex financial transactions. But how well do we actually understand any of these instruments in (brackets)? Moreover, why is there such widespread distrust in and about the financial system that governs our lives?
I don’t have a precise answer. But reflect on this hypothesis if you will – finance has become extremely specialised and less intelligible, a sort of black box. And that which we don’t understand, we don’t trust in. Consider this short paragraph that I found in Reserve Bank of India’s 2020 annual report.
“Looking back, global developments in 2019 offer several pensive reflections that have implications for the prospects for India, as for all other economies. It is now clear that the global economy recoupled in its downturn in 2019, dispelling the fissiparous movements that seemed to suggest differentiation in growth profiles of constituents in the year before.”
What did you take away from that?
This is how I propose we re-write it.
“Before 2019, it looked like India was going to grow at a much faster rate irrespective of the slowdown that was going on in the rest of the world. But 2019 proved us wrong. Hell broke loose for everybody. We aren’t the blue-eyed boy that we thought we were.”
Finance can and should be simplified in order for it to be more intelligible and more accessible – not just the language that surrounds it, but also the way it is described to us commoners. That is exactly what I am setting out to do at Everyfin – To provide thought leadership in the areas of personal finance, investments, asset allocation and events of macro-economic interest, while at the same time making it simple and easy to understand. Through this, I hope to add more colours to our collective view about finance and help make better financial decisions in life.
At this juncture, I must take my humility pills. Where I am sitting at is just the top of a molehill; the multifaceted world of modern finance on the other hand is a mountain. Only a shared effort will help us scale it. I hope you will be part of it. Please subscribe at www.everyfin.in to my Sunday weekly newsletter.
I will see you on the other end!