Step 3: Know the Difference Between risk and risky

Posted on by under Bibliophile: Cashflow Quadrant

Business and investing are not risky, but being under-educated is.

We are always taught in our school, family that business and investments are riskier so that we should stay far from it. But no one taught to build wealth, manage risk, and financial literacy.

Proper cash flow management can help us to go out of the rat race and debt trap. People not going for investment by considering it risky but when we are financially uneducated then that creates more risk to us. We have to understand what actual risk is. After the proper education, we can generate income from our assets as well as build more assets from income also. This will help us to attract fortune and financial freedom in our life.

When we write down our fears and work on overcoming them, then it will help us to grow fearlessly. Knowledge is the only option to grow substantially from any of the situations. We should start with scratch, learn about the various assets class, experiment small portion in all of them to find out which assets class suits our temperaments. After that start learning about mistakes made by others which helps us to stay one step ahead. Be ready to make mistakes and learn further from them.

Kindly check out mistakes and learn from well-known investors.

Bibliophile: Big Mistakes

Read for more detail: Rich Dad’s Cashflow Quadrant: Guide to Financial Freedom

Wish you all a happy and prosperous new year. Have a healthy and wealthy new year.

EVERYONE IS BEAUTIFUL AT THE TOP Halo Effect

Posted on by under Behavioral Finance

The halo effect occurs when a single aspect dazzles us and affects how we see the full picture. When we like something about some person then we start liking many things about them, also things which we may not observe about them. This is known as the halo effect.

When we meet someone and like him/her then slowly our emotions make more sense of liking various things of them which may or may not be observed by us. Or that may not be real. Reversely if we dislike the person or something at first impression then later on we tend to dislike more things about the same though it may be good.

The parable of the blind men and an elephant originated in the ancient Indian subcontinent, from where it has been widely diffused. It is a story of a group of blind men who have never come across an elephant before and who learn and imagine what the elephant is like by touching it. Each blind man feels a different part of the elephant’s body, but only one part, such as the side or the tusk. They then describe the elephant based on their limited experience and their descriptions of the elephant are different from each other. – Wikipedia

Investment – We see single elements to create an entire picture. Such has happened during the IT bubble and infra bubble. When prices of IT companies started rising, people think that IT is a new era, the world will be going to change and IT stocks remains shining forever. Same with infra, shortage of land, affordable housing, nuclear family, etc. But when the bubble got burst people started with different stories.

We should try to study all aspects in detail so that we do not make such mistakes of using one attribute as an entire story. If we have focused on one attribute and ignored others then we will be at a mercy of luck which might result in huge regret in the future.

Our first impression has a greater impact on our future perception of the same things. We should write down things which have an impression on our minds. And help system 2 to take charge. This makes us able to make a wise decision rather than fall into the first impression trap.

When we start with the company study and we found some liking features, later on, we like many things about a particular company. That may or may not be true. We have to be suspicious from starting and giving control to system 2. We can write down things that are making us biased and work on collecting disconfirming evidence. We should have worked on the scorecard method and given scores to every fact about the company. So that the end score can drive our decision rather than the halo effect.

This entire series will be reviewed with various examples from books which are “Thinking, Fast and Slow” and “The Art of Thinking Clearly“.

Step 2: Take Control of Your Cash Flow

Posted on by under Bibliophile: Cashflow Quadrant

We focus on earning more money with the belief that more money aids to knock out our problems. But if we do not have the skill to manage cash flow then higher-earning also will not be able to help us, even it can work as a curse for us. Many a time, with more money, people will increase their spending and take higher debt. This will create a problem bigger compared to what it was earlier. We are the CEO of our life so that we have to think in a way to improve our position.

Our liability is an asset for someone and we are working to make them rich rather than to make ourselves. We need to remember that good debt is debt someone else paid for us. Bad debt is a debt that we paid with our sweat and blood.

We need to learn to spend within our means rather than spending more on liabilities, we should work on increasing our means (assets).

We can reduce personal debt by not using multiple credit cards, focusing on earning a few amounts extra every month, try to repay slowly one by one debt. As we get debt-free then we should start investing the same amount which we paid every month on debt. This process will help us to grow steadily.

Investment always helps us to become financially free while debt drag down our dream.

Read for more detail: Rich Dad’s Cashflow Quadrant: Guide to Financial Freedom

CURB YOUR ENTHUSIASM Winner’s Curse

Posted on by under Behavioral Finance

The winner’s curse suggests that the winner of an auction often turns out to be the loser. When we bid on something for winning it then over some time, we start buying things at a sky-high value and that will end up as losers.

Business – when businesses adopt heard behavior and they see other businesses start acquiring businesses. So, they also involve buying businesses at a higher price to win the competition. Businesses win other businesses for time being but due to the higher price paid by them, this bid will result in a troublesome situation in the longer term. We have seen lots of high-priced acquisitions made by businesses that turn out to be trouble creating for the core business.   

Investment – IPOs, mergers, and acquisitions are part of the winner’s curse. As they offer the part to them who bid higher. So that winner gets stake of the company but the majority of the time, winner get it at a higher price and that ultimately losing things. During the regular buying of stocks, we have many buyers who wanted to buy a stock. So, one put a higher bid compared to others for buying it first so the last bidder comes as a loser. The current scenario is similar to the winner’s curse, with many high-priced IPOs floating to the bourse and people chasing it heavily. We don’t that many of those will survive in the future or not. And if survive then what will be the return going forward.

As Mr. Buffett has advised that we should not go for auction. If we have to go for it then first decide the maximum value then deduct 20% from it and do not bid a single penny on that deducted 20% amount.

This entire series will be reviewed with various examples from books which are “Thinking, Fast and Slow” and “The Art of Thinking Clearly“.