Is winning a game more important than playing it?
As individuals, we all want to win in the game of wealth creation.
In some ways, the game of creating wealth is no different from the game of cricket. Finance expert Sanjiv Mehta has tried to bring this out in his book Winning The Wealth Game: Cricket Strategies For Financial Freedom.
Sanjiv, an MBBS from the All India Institute of Medical Sciences, New Delhi, and an MBA with Dean's Honours List from Wharton School, USA, is currently managing director with wealth management company Finance Doctor Pvt Ltd.
Rahul, the protagonist in this book, who has been asked to lead the Wealth Creation Team, which has not been able to meet its targets yet again, accepts the challenge of winning the game of wealth creation.
He comes up with 14 mantras. We carried the first seven yesterday. Here are the rest...
8. Reading the pitch well -- when to enhance and when to preserve hard earned capital
India is presently a very good pitch. It is at the high growth stage of its economic business cycle and is, thus, a very attractive investment destination.
In contrast, European economies are slow growing. Therefore, earning less than 15 per cent annualised return in India will be a losing proposition while trying to earn more than 15 per cent return in Europe will be hazardous.
Rahul realises that, in a conducive environment, he has to ensure utilisation of opportunities and in a difficult economic environment, he has to implement preservation strategies.
9. Assessing team strengths and weaknesses -- determining your own winning total
Winning totals are individualised and customised and everybody can be a winner in the wealth game. Life cycle factors including age, sex, marital status, number of children, wealth, current income, future needs and a plethora of other factors determine what an individual's winning total is.
For example, an about-to-retire person has to create a monthly income while a young 35-year-old can take lot more risks in order to build up a sizable corpus for later needs.
Additionally, the desired life style will be very different from one person to another. For one team, a total of 320 could be a losing proposition while, for some, a total of 150 could be a winning one.
10. Selection of the right balanced team -- asset allocation
Rahul realises this is one of the most important decisions. There are different asset classes (players) available with different risk/ return characteristics. What makes stocks and real estate the top strikers and indispensable for a winning team? How and when do we deploy them? What is the role of bonds (defensive players)? Are small saving instruments over the hill and should they be retired? Or could there be a big hue and cry if these are dropped from the team?
11. Diversification -- it is a team sport
Harry M Markowitz won the 1990 Nobel Prize in Economics for his diversification theory. He analysed how wealth can be optimally invested in assets, which differ in regard to their expected return and risk. Essentially, he came up with a simple yet effective idea of not putting all your eggs in one basket, since it reduces risk considerably.
The Indian team, by depending solely on Sachin, was a consistent winner. Having several good strikers made a tremendous difference to the team's fortunes. Similarly, a winning portfolio requires stocks, bonds, real estate, insurance and other classes. Moreover, safe and liquid instruments are required too. An important factor is determining appropriate weightage to each asset class in the portfolio mix.
12. Special rules, regulations and performance
Every game has its own set of rules that can be capitalised on. In the first 10 overs, the fielding team can have only two fielders on the boundary line. Therefore, the batting teams try to accumulate as many runs as possible by sending their best strikers.
In the wealth game, it is beneficial to capitalise on government regulations, especially those that relate taxation. For example, long-term capital gains tax on stocks is absolutely zero and investment in ELSS (equity linked savings schemes) reduces taxable income up to a maximum of one lakh rupees under section 80C. More allocation to stocks is obvious, since the governments want to channelise domestic savings in stocks.
13. Winning mindset -- behavioural finance
The fact that the Indian team lost in 12 of the last 13 finals was no coincidence. Choking on big occasions has a lot to do with inability to handle mental pressure. The Indian team enlisted the services of an Australian sports psychologist and it has proved to be beneficial.
Yield-enhancing instruments (they give you higher profits after tax) are volatile and lead to lots of investors choking too. Rahul realises that understanding behavioural finance and investor psychology will be an important determiner of his success.
14. Going forward on this journey
Rahul's happiest memory is that of India winning the World Cup in 1983. This happened despite the Indian team not matching the star power of West Indies. However, as a team it proved to be the best. The players with their diverse skills complemented each other and became a potent combination.
The team was aware of its strengths and weaknesses and leveraged its strengths very successfully. They read the conditions very well and devised effective strategies. Above all, they had a winning mindset.
Rahul is determined to learn quickly all the skills and replicate that super success.
Part I -- Cricket and the game of wealth
~ Excerpted from Winning At The Wealth Game: Cricket Strategies For Financial Freedom, by Sanjiv Mehta, published by Tata McGraw Hill, Rs 295, with the publisher's permission.
~ Would you like to buy this book?