Investment totkas: Finance in the drawing room

In our society there exist a few enlightened ladies who are never short on offering a few nuggets of advice to those they deem unfortunate enough. They may tell one exactly what food may render one’s complexion fair, what occupation is the secret to a lifetime of happiness and what qualities one should look for in a spouse.

It would seem that these omnipotent ladies have discovered the instruction manual for life. For the rest of us, that manual seems to be in Chinese. I was pleasantly surprised when, having completed a degree in finance, I received a few pearls in advice from those I least expected to have an interest in finance. As one who never misses an opportunity to learn, I diligently started taking notes. Here is a collection of such gems on investment management. Unfortunately, not all of them are from those cheerful waddling women we dread running into at weddings.

Overheard:  You must invest in gold

Reason: It’s gold. Its value will never go down.

Reality: Gold is a “dead” investment. Apart from presenting a shiny distraction, it does not really serve much purpose for the economy. The asset cannot be used to produce any output and will not give any periodic returns. The only gain to be made from gold is from increasing gold prices or capital gains.

Fortunately, gold is a good protector of value, especially in times of need. Investment in gold tends to increase when individuals are increasingly risk-averse and believe the economy and currency are on the road to disaster. As investment in gold rises, there is less capital left for other forms of investment, which in turns stunts economic growth. The self-fulfilling prophecy is complete. A look at historic gold prices will reveal that it actually does decrease in times of growth and optimism.

Overheard: Buying land will give you enormous returns

Reason: My grandfather bought a plot of land thirty years ago that I recently sold for ten times the original price.

Reality: The effects of inflation seem lost on some individuals. Real estate prices are commonly a predecessor to or concurrent with inflation as excess money in the economy shuttles around from real estate to commodities such as cotton, gold and other safer investments.

Real estate investments are lucrative because rental payments from such investments are normally linked to inflation. A word of caution here though: Real estate is ridiculously difficult to liquidate in times of recession (try selling a plot of land in this economic climate), may fall as quickly as they rise and cannot be invested in convenient multiples of Rs1000.

Overheard: Stocks! Haram! It’s gambling! I know someone who lost their entire wealth in the stock market. Served him right too.

Reason: Ethos (and a beard to boot)

Reality: Blindly investing in stocks is akin to roulette. Investing all your savings into stocks is more like a game of Russian roulette. Stocks are perhaps the most liquid form of investment, usually pay out periodic dividends and carefully manufactured portfolios have outperformed almost all other investments in the long-term.

However, the volatility in stocks means that changing the composition of a portfolio daily is highly inadvisable. Furthermore, the investor should have enough capital to serve as a cushion in times of stock market distress. Finally, investments in stocks have to be extremely thoroughly researched. There is a reason why intermediaries such as brokers and wealth managers exist. Otherwise, one might be better served at a casino.