Trust, but verify

In financial transactions, the mantra is: "trust, but verify".

Read my article here



The English translation is as under:

The other day, I was talking to an investment advisor. He was very excited about the trust he has won from his clients. He claimed that he was so much trusted by his clients that they give him signed demat account slips and mutual fund transaction forms.

I asked if the client would ever give blank signed cheques to the same advisor. He laughed it off. Nobody in one’s right mind would ever give blank cheques.

So often, people consider this argument of comparing blank cheques with signed demat slips as ridiculous and laugh it off. While giving someone a blank cheque is accepted as a huge risk, giving a blank signed demat slip is not.

So let us understand what all can happen if you give signed blank demat slip to someone. You are letting the person fill in the details without your knowledge, yet legally you have approved whatever he writes on the slip. This “whatever” means that he can transfer the securities from your demat account to his personal account or anybody else’s account. If it comes to your notice, one can argue that it was just a mistake and he can return the securities in your account.

One has also come across cases where the investor lets the securities remain in the broker’s pool account. When the investor was suggested not to do so, he came up with arguments: (i) it is convenient; (ii) he wanted to avoid the transfer charges. The convenience argument also appeared in case of giving signed but blank demat transaction slips.

So often, we seek to avoid minor inconveniences and fall in a major trap.

In both the above cases, one is offering an opportunity to someone to defraud. Are we suggesting that you should not trust anyone? Well, we cannot. It is one’s choice to decide whom to trust and whom not to. However, we would only like to ask one question, “What is the priority – safety or convenience?” And then to what extent do we want to compromise one for the other?

This is not just about demat accounts. There have been many instances of defrauding innocent investors by conmen. Some have collected cash from investors for depositing in the post office schemes. The amount never reached the post office.

Majority of the frauds have this pattern in common. It all starts with convenience and the same is given the name of trust. Convenience is the primary objective. The conman pretends to be trustworthy and sells the convenience part. He keeps both the decisions and custody of assets with him. The custody is kept in form of the transaction slips in the above example. If someone has the authority to take decisions and also controls the transaction related documents, it becomes easy to commit fraud.

Trusting someone is not bad, as we have already mentioned earlier. However, once convenience becomes a habit, it takes a painful experience to once again get trust on priority.

Mutual funds are a bit different. When redemption is filed in a mutual fund scheme, the proceeds would only go to the investor’s bank account registered with the mutual fund folio. Mutual funds have built this safety mechanism in place and hence they do not issue cheques to third party.

For all other investment avenues, please insist on transfer of all the money only through the banking channel. Else deal through mutual funds, which do not accept cash beyond Rs. 20,000 and always pay the redemption proceeds and dividends in the registered bank accounts.

An investor would be better off being objective in deciding the trust v/s convenience equation. It is better to decide whom to trust and why. Even after that, it is good to take stock of the situation once in a while. Blind trust may not always be desirable. The mantra to remember should be, “Trust, but verify”.

Wish you a very happy 2016!

-        Amit Trivedi

The author runs Karmayog Knowledge Academy. Recently, Amit has authored a book titled “Riding the Roller Coaster – Lessons from Financial Market Cycles We Repeatedly Forget”. The views expressed are his personal opinions.

This was written way back in 2006

I wrote this article in 2006 and was published on www.moneycontrol.com in March 2007. It still makes sense. Nothing has changed. Click here to read further

Retail therapy - is not a therapy - it's a disease in itself that needs to be cured

Indulge in retail therapy today – said the day’s horoscope. This line caught my attention.

What does this mean? Is it possible to “indulge” in a “therapy”? So I looked up the dictionary to understand the meanings of these two words.

Therapy means treatment of physical, mental or social disorders or disease

To indulge means to satisfy a desire or to allow someone to have what one wants. To indulge also means to pamper or to spoil. The latter is the more popular among all usages of the term.

Going by the above, if someone wants to indulge, the chances are that therapy may be needed to stop him / her from indulgence.

In the last few years, this term “retail therapy” has been quite popular. It is promoted as a “stress buster”. So what is retail therapy?

Wikipedia defines “retail therapy” as under:

Retail therapy is shopping with the primary purpose of improving the buyer's mood or disposition. Often seen in people during periods of depression or transition, it is normally a short-lived habit. Items purchased during periods of retail therapy are sometimes referred to as "comfort buys".

Retail therapy was first used as a term in the 1980s with the first reference being this sentence in the Chicago Tribune of Christmas Eve 1986: "We've become a nation measuring out our lives in shopping bags and nursing our psychic ills through retail therapy."

To put it another way, it is a way to indulge oneself into the act of shopping without feeling guilty about it. Or it is a way of separating one from one’s money minus the guilt associated with it, till the credit card company sends the bill.

We all indulge in shopping once in a while, but to use it to lift one’s mood – well, think about it. I read some of the usages of the phrase on the Internet, and was shocked. Here are a few samples:

·      My boyfriend dumped me. I went for retail therapy and felt better.

·      I failed in the college exam. I need some retail therapy.

·      Nothing beats spending money to forget about your troubles.

Beats me, at least.

All these examples are about curing the symptom called “bad mood” and not curing the problem – not even addressing the real problem. This is not a great insight – this is as clear as the sunshine.

Retail therapy, in my understanding, is a term coined by some smart marketers to keep their cash registers clinking. As mentioned earlier, it is a way to make consumers spend more without feeling guilty about it.

This is not to suggest that you should not spend. It is your money, after all. Spend your money the way you want. If you want to splurge, nobody should stop you. However, just be honest to yourself. Call is splurging, call it indulgence, call it spending, call it by any such name; just don’t give it the name of therapy to fool yourself and everybody around you.

This could turn out to be a trap and the pains would be felt later – sometime much later, either when the bills come or when the retirement corpus is insufficient.

Retail therapy is not a therapy. It's a disease in itself that needs therapy.

Happy shopping this festive season!

-       Amit Trivedi 

A Dozen Things I’ve Learned About Investing from Daniel Kahneman - a blog post by Tren Griffins

A dozen things I've learned about investing from Daniel Kahneman

First impression

The other day, I was watching TV with my 4 year old son. The program was one of his favourite game shows. When one of the participants entered, my son asked me whether he will win. I did something I normally refrain from doing. I tried to predict whether the participant would win. I thought he would not and told my son so.

Later, I was replaying the whole experience and tried to understand what made me think whether the player would win. The answer was very simple and yet shocking. But before going to the answer, let us understand what one knew about the game. This is one of the game shows that my kids love to watch and hence I have also watched it very often.

My prediction was largely based on what I had seen of various participants – some won and some did not. One was trying to correlate certain “first impressions” with the player’s ability to win. And what does one see in less than half a minute? It is the body posture, the confidence – lack of it, enough of it or overconfidence, mannerisms, etc. – broadly a combination of body language and the appearance. And I knew the answer why I thought the participant would lose. His mannerisms exhibited arrogance and lack of seriousness. And I do not like arrogance.

This is what you call first impression. The mind judges through the first impression. It processes the immediately available information and jumps to a conclusion.

Well, what happened in case of the game show was quite harmless, but when decisions are taken with such biases, sometimes they may turn out to be very costly.