Simple Ideas on Wealth Creation, the Subramoney Way – Part 4

Vishal: What’s your view on gold as an asset class? How much allocation one should have of the yellow metal?

Subra: People keep on saying that gold has no value but unless you outperform gold, you have no right to say it. For example, when Warren Buffett says gold has no value, he makes sense because he has outperformed it. But a fund manager who is underperforming gold and says it has not value is in trouble, because he would have to answer his investors on why he is underperforming gold.

So, there will be points in time when gold will do well, like when there’s uncertainty in the market, or due to geo-political reasons, but if you’re an optimist, you’ve to assume that these kinds of skirmishes will not be much. So, over long periods of sustained development, I don’t see gold having a great place in your portfolio.

But let’s face it. If you were in Kuwait in 1980, or in Pakistan in 1947, and you had to run away from your house, the only thing you could’ve carried is gold. To such people, gold has tremendous value.

But in a demat form, in an ETF form, you can put a small percentage to keep yourself happy. Otherwise, gold is just an expense. If your wife needs gold for wearing, that’s an expense. Of course you can use it in an emergency, but how many of us look at gold as an emergency fund?

For a person in the 25-40 years of age, around 10% should be in debt which should also include gold.

• Also Read: Part 1 | Part 2 | Part 3

Vishal: What qualities should an investor, who does not want to go it all alone, look at in a financial advisor? What are the most important questions he/she must ask before signing up with an advisor?

Subra: This is s very small question with a very long answer. There is no single qualification that allows you to think this guy is good or bad. Today you have doctors who are doing financial planning, you have engineers who’re doing it, you have CFPs and CFAs and everybody doing it.

Look at a financial planner with some experience. You don’t want to look at someone with no experience. Look at how many clients he has and what is the range of clients he has. Does he have very rich people or very poor people or people like you, or does he have complicated clients – somebody who’s had a divorce, somebody who’s had children from the first marriage, or whose parents had a divorce, somebody who dies young without insurance or with insurance.

If he has got this rainbow of clients, it means he has at least gone through the process of thinking. Now, if he typically has all salaried employees working in IT companies and aged around 35 years, he cannot think of these complications. He may not even advise you to make a will. That kind of thing will not help.

So, his experience matters. His knowledge matters. And his integrity matters. If you don’t know how he’s being compensated, understand that you are compensating him.

So, separate the advisor from the investment. You go to him and say, “I will spend one hour with you and pay Rs 5,000.” And then you go and invest somewhere else, because then I think you will get more honest advise.

Don’t go to a doctor-cum-chemist. Go to a doctor separately and a chemist separately. Or you go to a doctor-cum-chemist provided he is older, has more experience, and he is transparent. You need to understand what he is doing.

Remember that he will be compensated on the assets he accumulates not on how you do. But that’s fine because there is no reason to assume that your financial planner is a fund manager. He is not! You or your daughter are as capable of finding the next best fund as your financial advisor. His probability is not higher.

The process of selecting a financial planner is so complicated – you have to know so much – that by that time you can learn and do it all by yourself.

But a good financial planner can bring discipline in your life. He can help you plan better. Good financial planning is a combination of your ability to understand, his ability to communicate, and your ability to gel well together.

If you have these combinations, it works, or it doesn’t work.

One financial planner in one investment can cause you so much damage that all the alpha that you think he has created for you will be lost. I know people who lost Rs 15-20 lac in the NSEL fraud, which meant all the alpha their advisors had helped them create over the last 10-15 years was wiped out in one transaction.

Often we do not even know why we need a financial planner. You have a stomach ache and you go to a doctor, but you don’t even know why you should go to a financial planner. When you go to a planner, you don’t know what you want. He also doesn’t know what you want. So, it’s a very difficult relationship to start.

The worst thing about going to a financial planner is that you think you’re in very safe hands, and that you’re doing well. But actually it turns out that you’re not doing so well, and you’re getting sub-optimal returns.

You don’t know how to monitor what he’s doing and you don’t know how to calculate the returns you’re getting in a fund. So, if the weighted average return on your portfolio is less than the index, or it is less than the inflation that is affecting you, the financial planner has not played his role. You might’ve as well be in the index.

Now the problem with this advice – put money in an index fund, take term insurance, get one credit card and one savings bank account – is that why should somebody pay an advisor Rs 25,000 for this?

Believe me, this is brilliant advice! But the advisor will never get paid for it. So he will ask you to do F&O, invest here and there and everywhere – he needs to create all those complications to make money. It’s a very funny situation.

And by the time you realize the value of a good financial planner, you’re already fifty or sixty.

Vishal: What’s your two-minute advice to a young person on how he/she can become a smarter decision maker as far as his investment life is concerned?

Subra: If I were to use just one word for it, it would be – Start!

People wait. In running or investing, the advice is the same – To start, start. Don’t keep waiting to find the best advisor or best fund. Please make a beginning and see where you are going. Write down what you want in life out of your investments.

Maintain an investment diary, and an investment philosophy statement. Once you do these things, things will fall in place.

But for heaven’s sake, start. Don’t wait.

Vishal: What are your top three suggestions for investing and related books/resources?

Subra: Read Burton Malkiel’s A Random Walk Down Wall Street.

Then, read Nassim Taleb’s Fooled by Randomness. Read on behavioural finance that can include Parag Parikh’s book. If you’re not from an accounting background, learn accounting.

Read about history of how people have invested. That has not changed at all! Whether it was the Tulip mania of 1600s or the ULIP mania of 2000s, the same things happen again and again. People just believe they can get sensational returns. So read from history. Peter Bernstein’s Capital Ideas is a good book to read.

All these are American books. So you need to understand how much of that will be applicable to India and how to adapt. And then read annual reports.

Set for yourself a target like you should read 30 pages a day, which doesn’t look very difficult. Then read, and read everything.

Vishal: You inspire so many. Who inspires you?

Subra: The person who has really inspired me is Jagadguru Shankaracharya. Once he was asked “You are a leader of a few people based in South India. Why do you call yourself a Jagadguru (teacher of the world)? He smiled and said, “Jagadguru means that the jagad (world) is my guru (teacher). I learn from everybody.”

One more person who inspires me is Mahatma Gandhi. It was him who said things that are so unique that nobody else has ever said them.

He first talked about “choosing your problems.” Normally we think our problems come to us and we don’t choose them. That’s not true. We choose which problems to address first. Should I address my stomach ache or should I address my meeting with the viceroy? I’m sure that he chose the viceroy meeting was more important and he ignored his stomach ache.

Then, he said “I’m rich by the things I can live without.”

Then, he said that you should be ashamed to say you’re not well. Ask yourself what you did to your body that you’re not well.

There I’ve been lucky. I’ve found a doctor who has kept me away from medicines for the last 30+ years. I’ve not touched any medicine.

So, I think your health and your wealth depends on the quality of advice you get. I’ve not changed my broker, and I’ve not changed my doctor for about 30-40 years. I’ve not even changed my fund managers.

Narendra Modi also inspires me. Look at his energy. He has tremendous discipline.

Vishal: Great Subra! That’s all from my side. Thank you so much for being the inspiration that you are!

Subra: Thanks Vishal!

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