December 16, 2014

The Importance Of Asking Questions

When it comes to unravelling any complex concept, it is said that there is no better way to do so than by asking questions.  I would go further and say that to navigate the complexity of investments and markets, our ability to ask questions is an essential survival tool.  Over the years, as an investment advisor and an observer of the mutual fund industry, I have come to see this ability as a key differentiator between those who have truly benefitted from investing in mutual funds and those who have not.

Indeed, the edifice of my own learning has been built on this foundation.  Soon after I got started in this business, we had one of the most spectacular bull runs that the Indian markets have ever seen.  Seeing the BSE Sensex soar by around 300% between Jan 1991 and April 1992 made investing in equities seem like a cakewalk.  It also made it easy to be blind to the inevitable, brutal downslide.  Despite the existence of stock markets for over a century, there were no handbooks, manuals or courses of any consequence which could guide inexperienced investors or wannabe advisors.

Those were early days for mutual funds.  The lack of good regulatory understanding allowed for schemes to assure returns despite market risk.  It allowed for closed-end equity schemes to be freely peddled by thousands of agents who had no experience or understanding of the risks associated with these products.  All put together, it set the stage for hundreds of thousands of investors, who had no temperament for the uncertainty of equity markets, to trade the safety of fixed deposits for these products.  It was the perfect recipe for disaster.  My knack of asking questions is the primary trait that I can credit with guiding me and eventually, my clients, through this minefield.

If the intent is to clarify doubt, then there is no such thing as a ‘silly question.’  Any question, every question, in its own way, can help.  As an investor and an advisor, I never hesitated to ask questions, no matter how much of a fool I risked appearing.    For instance, I would ask fund managers about what gave them the confidence that they would be able to deliver returns that are better than a fixed deposit. Or, how certain were they that when they decided to sell some of the stocks that they held, there would be someone willing to buy those stocks.  Or, in a closed end scheme, if there are far too many investors, could one reasonably hope to find buyers if one wanted to sell one’s units before maturity?

Not every question would get clear or even adequate answers.  But, altogether, they were enough to clear the haze and lay bare the nature of risk.  In fact, I would stick my neck out and suggest that for any investor there can be no more important thing to learn than the nature of risk, and that there is no better way to do so than by asking questions.  In my opinion, it is too complicated a subject for any amount of educational material to do justice to it.

In the US, the Securities and Exchange Commission has a publication titled, Ask Questions.  It lists questions that investors should ask about investment products, the people who sell these products, and even about the progress of one’s investments.  It starts with this advice:

“Ask Questions.  That’s the best advice we can give you about how to invest wisely. We see too many investors who might
have avoided trouble and losses if they had asked basic questions from the start.”

Though it is meant for American investors, in the absence of anything similar in India, I would strongly urge investors to check it out.

I would like to close this post with the remarks of a US investment regulator who probably did more than anyone I can think of, to protect and educate investors.  In one of his many, memorable speeches, Arthur Levitt said:

“As an investor, you certainly have the right to be treated fairly, to get straight answers to straight questions, to know what you are buying and what you are paying for it. But as an investor, you also have an obligation to ask questions – many questions – to seek out information, and contemplate your own tolerance for risk.”  

He closed that speech with these invaluable words:

Say yes to informed, careful, realistic, skeptical and long-term investing.”

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