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Being Zen in frenzied times

LiveMint logoLiveMint 08-08-2017 Monika Halan

Low Risk High Return Buy 5000 SHARES Of xxxx CMP Rs 7.80 TGT Rs 15 SL Rs 7.70 . Stock Raise Non Stop Till Diwali.” Over the past few weeks some of us would have got messages pushing this one stock.

As markets keep moving up, the frenzied calls and SMS texts that push up a particular stock increase in frequency. I don’t get emails or WhatsApp messages pitching stocks—just calls and SMSes. Some of the callers are really aggressive. Push back at them and they start snarling. Obviously they’re sitting on very steep customer acquisition targets. But we know from past experience that any kind of frenzy usually ends badly. If you gave into the frenzy of real estate a few years back, you’re looking at a nominal erosion of 30-40% of the price you paid. An inflation- and mortgage-cost-adjusted loss will be closer to 50-60%. Frenzies are unsettling. You lose your equilibrium. You get pushed into doing things that you normally won’t do. If you find yourself thinking of suddenly moving money into one stock or one mid-cap mutual fund on a tip, you know you’ve succumbed to the frenzy. Otherwise I’m-safe-in-an-FD (fixed deposit) people are suddenly discovering their risk appetite and want to invest right away on a tip.

How to remain Zen? Staying calm when everybody around you is losing it is one of the toughest things to do. I’ve written about this earlier but let’s go over the list one more time. There is a financial checklist that you need to get through before you buy. What does the product cost? What does it return? How much do you make from this sale and every year after that? How long do I need to hold the product for the best outcome? What happens if I exit midway? Ask the person to write this on a paper and put his or her name on it. But the financial checklist does very little good when there is a penny stock being pushed. There is no logical reason to buy that stock other than the frenzy around a price rise in the near term. It appeals to your greed and desire to win.

For such sales spiels, whether it is a stock or emu farms or a real estate deal, there is an emotional checklist that you need to tick off. This is far harder to do than the one that has costs and benefits to examine. The emotional push and rush is one of the main reasons people fall for the hard sales pitch. One, there is no deal that will get over tomorrow. If somebody is chasing you very hard pitching a deal, it is a red flag. Two, ask the question: if the deal is really so good, why is the seller pitching it so hard to you. Is he a friend, a well wisher, a relative and if she is any of these, when was the last time, before this deal, the person spoke to you or brought you a gift? Three, examine why you want to do the deal. Is it the return? Is it the thrill of a win? Is it the swagger of being able to tell a hero warrior on the stock market story at the evening social do? Financial decisions are best served cold, setting aside emotions. Know that the people who hard sell are masters at knowing what buttons to press to get your attention. They then insert an emotional hook. And once you bite—they reel you in fast. Senior citizens are particularly vulnerable, especially when the seller appeals to their sense of insecurity due to an aging body and loss of purpose in life as the work life gets over. The kids are busy and have their own lives. Disgruntlement builds up. And you want to exert yourself by winning one more time. Pure recipe for disaster. Stay with your poor FD rather than lose your capital to some sharp suit. Four, ask the question: can I afford the loss if this investment goes to zero? If you’ve been afraid of buying equity mutual funds due to the risk in them and you are thinking of a penny stock—you are very near losing your money.

You are not alone in getting hard-sold by fraudsters and cheats in suits from the financial sector. It happens across the world. A recent US Securities and Exchange Commission (SEC) alert cautions the over 5 million federal employees against scam artists who want to churn retirement funds from a good low-cost plan to one that benefits the sellers. Read more on this here: nyti.ms/2vGhzNJ.

Brokers pretending to be affiliated to the government encouraged federal employees nearing retirement—that means fat retirement corpuses—to move from low-cost investor-friendly plans to high-cost, variable annuities that had lots of hidden costs that were not disclosed. Last week I met David Medine, a consultant at CGAP, or Consultative Group to Assist the Poor, which works on financial inclusion. Medine, like many of us, worries about issues of consumer protection in finance. He said that the one reason credit cards are safe is because the maximum liability on the consumer in the US is $50. Because the onus is on the card companies to pay for mis-use, they put in systems and processes. It does tick my old argument for moving to a ‘seller beware world’ in retail finance, where the seller has to ensure that the product is suitable.

Monika Halan works in the area of consumer protection in finance. She is consulting editor Mint and on the board of FPSB India. She can be reached at monika.h@livemint.com

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