MasterMind : Advisor Insights
2 useful stories to help clients invest wisely
Raj Talati, ABN Investments, Vadodara

imgbd MasterMind is a joint initiative between Sundaram Mutual and Wealth Forum, in which we offer insights into how you can become a more effective advisor to your clients, by understanding them better, understanding how they think, understanding how they take financial decisions. This gateway into your clients' minds we believe will help you relate better to them, communicate more effectively with them and thus serve them better. Mastering your client's mind is your gateway to becoming a more successful advisor. Its not for nothing that they say, "Its all in the mind!"

In this article of the Advisor Insights series within MasterMind, Raj Talati, one of Vadodara's leading financial advisors, shares two interesting stories he narrates to clients to help them take two very important steps that help them invest wisely. Do you struggle to get your clients to buy equity low and sell high, when they seem to do just the opposite? Do you struggle to get your clients to buy into the concept of "inflation-proofing" their portfolios? Read on as Raj shares stories and approaches which help him communicate these concepts effectively to his clients.

How to convince clients to buy equity when markets are low

We all try various ways to get clients to buy low and sell high, but as we all know, this is one of the most difficult tasks for any advisor. Greed and fear create exactly the opposite thoughts in client minds - and they are more prone to buy high and sell low rather than the other way around. Rather than showing them charts and PE multiples, I try taking them through situations which they can relate to easily.

In Vadodara, there is a very famous vada-pav joint called Tasty Vada Pav. Its actually still run out of a hand-cart, but its hugely successful. To give you a perspective of just how successful Tasty Vada Pav is, last year, there was an income tax raid on the owner, and he declared an income of Rs.2.5 crores after the raid!

Now, everybody in Vadodara knows Tasty Vada Pav, and after his tax raid, he has become a mini-celebrity! I ask my clients this : suppose the owner of Tasty Vada Pav closes another great year and now wants to open up more branches, for which he seeks you as a partner. Would you be interested? Most clients say yes. I then ask them whether they think the price of partnership is likely to be stiff given the huge brand value and high profits. They say yes, but that it may still be worth it, from a long term point of view. And, they readily acknowledge that such a franchise cannot anyway be bought into cheaply.

Now, I turn around and ask them this : suppose the owner of Tasty Vada Pav came to you one week after the IT raid, as he is suddenly a little strapped for cash, having paid up all the taxes and penalties during the raid. Will you now be able to negotiate a better partnership deal with him, at a more advantageous price? The answer is always yes. Then I ask them : what out of the tax raid has in anyway reduced the business potential of Tasty Vada Pav? All of them say it has no lasting impact, but that it presents a great opportunity for a partner to come in during a slightly difficult period at a good price.

Then, I try and link their responses to investing into Tasty Vada Pav when the chips are temporarily down, to their actions of investing in equity markets. I link a bear phase to the tax raid situation of Tasty Vada Pav and a bull phase to when he makes another record year of profits and then seeks investors at a fancy price. This helps my clients understand why they must be greedy when others are fearful and must be fearful when others are greedy.

Impact of inflation

All of us try to educate our clients about inflation and the hugely negative impact it can have on their long term finances. The trouble many of us have is that when we show an 8% or a 9% figure, many clients are not able to readily grasp the long term impact of this number. In our day to day lives, we see prices creeping up - not jumping up. By the time the next price hike comes, we are mentally adjusted to the current price and therefore the new price appears a small hike on the current one rather than a big hike over a longer period of time. If we are paying Rs. 22 for a loaf of bread now and it goes up tomorrow to Rs.23, we don't like it, but all said and done, its one rupee more. We pay it and life goes on. We don't stop and analyse how much we paid 5 years ago and therefore what we are likely to pay 5 years from now and 10 years from now. Its only when we think about this, that we will understand the magnitude of the challenge that inflation poses for all of us.

To help clients understand the magnitude of the problem, I tell them to play along with me through a little story. I tell my client to imagine that like Kumbhakaran, he fell asleep for a long time. When he wakes up, he doesn't know how long he slept, but he knows it was for quite a long time. He is hungry - very hungry. He gets into his car and drives to the nearby provision store. On his way, he stops by for petrol as the tank is nearly empty. He fills 10 litres of petrol and is stunned when the bill adds up to Rs. 1900. There must be some mistake, he thinks. He checks the bill and to his horror, he sees that the price of petrol is no longer Rs.80 which it was when he last filled the tank, but has suddenly shot up to Rs.190 per litre. Now, he is very worried. He had Rs.2000 in his pocket, and suddenly there's only a single 100 rupee note left, and he is still very hungry. He reaches the provision store and asks for a loaf of bread. The shopkeeper gives him the bread and asks for Rs. 57. Our friend is stunned again - wasn't it Rs.24 the last time he bought a loaf of bread? Now, with only Rs.43 in his pocket, he cuts out all hopes of buying butter and cheese and meekly prepares to go back home. When leaving the store, he casually glances up at the colourful banners on the store entrance which cheerfully proclaim "Happy New Year 2024". He thought it was 2014 - how did it suddenly become 2024? Has he slept through 10 long years? As he drove back home, he kept thinking : I always kept Rs.2000 as emergency cash in my pocket. Today, how worthless this same Rs.2000 has become! I couldn't even buy myself butter and cheese and am going back home with only a loaf of bread, 10 litres of petrol in my car and nothing in my pocket.

This story helps clients understand the long term impact of inflation and how it can make even a sound financial condition become precarious over time, without proper investment planning that can fight inflation. After narrating this story, clients become more receptive to looking at our long term charts and all the numbers that we financial planners love taking our clients through.

My learning from client interactions is that we need to find ways of first making clients receptive to the ideas and thoughts we would like to share with them. Without getting this alignment, we will struggle to get our point across. The flip side - if we spend some time in setting the context, in helping clients understand the big picture and getting alignment, the rest of the number crunching becomes a lot easier to go through and agreement on solutions becomes easier to obtain.

All content in MasterMind is created by Wealth Forum and should not be construed as an opinion of Sundaram Mutual Fund.

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