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D.Muthukrishnan (Muthu), Certified Financial Planner- Personal Financial Advisor

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Memory and control

Posted by Muthu on August 10, 2013

Dunbar number. What is this? Some people say that they have over thousand friends in social network. Like wise some other says that they know over thousand people well from their community in native place etc. If what they say is true, they are outliers. There have been many studies as to how many relationships we can effectively maintain. The number varies between 150 to 250. Our cognitive capacity does not allow us to form more than 150 meaningful relationships in our life. 

Anthropologist Robin Dunbar is one of the authorities who have well researched on this subject. He says that our innermost circle is 3 to 5 friends. Then there is a circle of around 12 to 15, whose death would be devastating to us. Despite social network and technology developments, our brain cannot maintain meaningful relationships beyond a point. Though Dunbar’s number may not be sacrosanct, it gives an idea for each of us to introspect and understand how many genuine relationships we are capable of maintaining both personally and professionally. I feel that this number may vary for each one of us but would be broadly within a range.

I come across people including from our professional community who are worried about both global and domestic economic scenario. Our worries are amplified by screaming headlines and news in business media. And to some extent, even the main stream media are covering this, as they want to provide feeder for our worry. It’s always negative news that sells faster.

I’m not trying to imply that things are hunky dory now. That would be like burying one’s head in sand. But I’m confident that it is not going to be an Armageddon. Economy and markets always go through cycles. Whichever part of the cycle we are in, we tend to think that would last forever. Many also have opinion that government and governance cannot get any worse than this.

Before proceeding further, I want to quote from what Warren Buffet wrote to his shareholders in 1994. The message is as relevant today:

“We will continue to ignore political and economic forecasts, which are an expensive distraction for many investors and businessmen. Thirty years ago, no one could have foreseen the huge expansion of the Vietnam War, wage and price controls, two oil shocks, the resignation of a president, the dissolution of the Soviet Union, a one-day drop in the Dow of 508 points, or treasury bill yields fluctuating between 2.8% and 17.4%.

But, surprise – none of these blockbuster events made the slightest dent in Ben Graham’s investment principles. Nor did they render unsound the negotiated purchases of fine businesses at sensible prices. Imagine the cost to us, then, if we had let a fear of unknowns cause us to defer or alter the deployment of capital. Indeed, we have usually made our best purchases when apprehensions about some macro event were at a peak. Fear is the foe of the faddist, but the friend of the fundamentalist.

A different set of major shocks is sure to occur in the next 30 years. We will neither try to predict these nor to profit from them. If we can identify businesses similar to those we have purchased in the past, external surprises will have little effect on our long-term results.

Talking about government and governance, markets are politically agnostic. Economic cycles are independent of efficiency or otherwise of the government. A good government can definitely be of some help during bad economic cycle and a bad government can to some extent make a dent during good economic cycle. Government neither creates nor control cycles. In fact government’s fortune is very much affected by these cycles as well.

I would like to repeat few things I’ve mentioned in the past.

All the governments in post independence era have always been corrupt. Some more corrupt than the other. The depth and scale of corruption happened in Indira Gandhi’s era was much more than today. The media was made powerless then and hence nothing came out. If you want to know more, you can read PMO diary by B.N.Tandon, who is a well respected officer and was in Indira Gandhi’s PMO for many years.

If you can recollect Tehelka tapes, the BJP is no better than Congress in corruption.

RTI and media are now bringing in lot of skeletons from government’s cupboard. If you have read about Nira Radia tapes, you would know how media is also corrupt:-)

Ethics in corporate world is very relative and the above tape reveals few not so good things about even Tata.

Like wise, people who say that the worst economic crisis in the world was in 2008, it shows that they have not bothered to read history. Always every crisis looks the worst so far. Some tell that banks are going to dogs because of high NPAs and this is the worst which has happened in India. No doubt public sector banks NPA is increasing but they are still around 5%. In late seventies and eighties, many banks proudly boasted NPAs of around 15%+.

Incidentally I happen to see and read lot of analysis and forecasts on future political results on markets. Though it is fun to read all of them, they are utterly useless. Markets are politically agnostic-whether it is Congress or BJP or Third Front. Our memory often fails us, though I’m saying below out of my memory which need not be 100% accurate:-) 

The strongest leg of last bull run happened when UPA-1 was in power with day to day bickering by Left. Nobody would have forgotten the weekly breakfast meetings, constant threats and common minimum program. Despite leftist ideological domination, bulls marched ahead. 

Out of the 6 years of BJP rule, 3 years were marked by bull and another 3 by bear market- 50/50! 

Between 1980 and 1990, markets almost multiplied by 10 times, when socialist government of Indira Gandhi was in power (due to loan melas PSU banks NPAs went as high as 16%) and this was the period when she was assassinated, Punjab burned, government and parliament was crippled for 2 years due to Bofors scandal, a motley crowd of political parties with extreme ideologies (left and BJP) formed a functionless government, with a politician like Devilal who had subzero knowledge on economy, governance and administration calling the shots. 

Markets have a mind of its own and follow its own cycles which are influenced by innumerable things. Our memory is always short and we take every near term event seriously. As I said, fun but utterly useless and it may be damaging to one’s portfolio and hence financial health.

Over coming short term memory domination by understanding the broader picture and long term Performance would ensure we do not loose sight of our path and goals.

We cannot control any external events. We can discuss, debate and analyze but the fact of the matter is we have no control over business, political and economic environment. What we can control is our behavior. We can stop reacting to all events and news. We need not gyrate to the tunes of the media hype and fear. Instead we can focus on our chosen investment tenure and personal goals. We can learn to ignore the noise and make course correction if necessary based only on the facts of the situation.

Controlling our behaviour and not getting carried away by short term memory would save us money, energy, time and above all emotional turmoil.

Let us take control.

4 Responses to “Memory and control”

  1. Usha said

    “All the governments in post independence era have always been corrupt. Some more corrupt than the other.” So sad, so true. Is this the norm for all third world countries before they hopefully become advanced, or at least have roti, kapda, makaan, roads, clean water? Why I ask is because I see that another of the BRIC countries, Brazil, is also facing similar problems.

  2. Muthu said

    You’re right. Usually poorer countries are more corrupt. Development results in education and awareness which in turn reduces corruption. We’ve miles to go…

  3. Deepak said

    Dear Muthu,

    a good one – I have SIPs running every month and looking at them in the monthend and seeing most of that months investment wiped out makes me cringe…. but then thats what SIP is supposed to do – they say taking trading losses needs strength but this is tougher 🙂

  4. Kishor said

    Very nice article Muthu ji..!
    Seing this govt failure on numerous fronts…i recall what Ratan Tata had said…..slowly we are transiting to become a Banana Rebublic…..i pray to God …..that 2014 come quite soon.

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