|»5 Minute Wrap Up by Equitymaster|
On This Day - 13 DECEMBER 2010
Are you financially intelligent?
In this issue:
------------------------------ "Price of gold could go down 20%, 30%"... ------------------------------
In short, the idea to 'know finance' to make better investing decisions seems unquestionable. Or does it?
A study done at the University of Pennsylvania suggests otherwise. As per it, there is a big downside of getting financially intelligent. And this is what it has to conclude. Financial intelligence increases the confidence levels in an investor which leads him to make worse investing decisions!
The study reports - "...finance courses increase confidence, but this could reflect overconfidence..." It also cites an example - "Over-optimism and over-confidence in finance decision making is widespread. In a 2005 survey, 65% of Americans believed they were 'very' or 'highly' knowledgeable about personal finance, although they performed abysmally on objective questions about the subject."
This sums up the reason why so many investors run into financial problems despite being financially intelligent. We believe the idea of financial knowledge in isolation isn't enough. The need is to combine emotional intelligence with it as well.
As Warren Buffett once said, "Success in investing doesn't correlate with IQ once you're above the level of 25. Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble in investing."
Among other key Asian markets, while China closed with gains of 2.9%, Japan and Hong Kong were up 0.8% and 0.7% respectively.
An article in Forbes India has further reinforced this point. It shows how a severe shortage of auto parts is perhaps acting as the biggest spanner in the wheels of promising growth that the Indian auto industry could see in years to come. The Indian auto components industry feels that they have been in done in by the lack of faith shown by the auto manufacturers and hence, now face huge resource crunch to come up with new capacities and increase their R&D. We believe the problem will have to be sorted out soon or else the Indian economy will face another huge bottleneck.
There are good reasons to learn the Chinese language (Mandarin). The pivot of business is gradually shifting from the West to China. The Chinese economy is already the world's second biggest after America. Soon, Indians will do business in China just the way they do business in the US and Europe today. Currently, about 150 Indian companies operate in China while there are about 40 Chinese companies doing business in India. China has already overtaken the US to become India's largest trade partner. However, India is only the fourteenth largest trade partner for China. Also, China is quickly shifting from an export-driven emphasis to a domestic consumption model. And unlike many other economies where business deals are scripted in English, in China, Mandarin is the language of all agreements. To add to all this, the rule of law is weak in China. So knowing the country's language, culture and customs will be a key to doing business and building trust.
It must also be noted that the Chinese are busy polishing their English. This will pose a risk to our 'English advantage'. And not just that! They are also taking lessons in Hindi. So the CBSE board's recommendation is quite timely. Though putting the education board's plan to practice may seem difficult now, given the scarcity of teaching staff and infrastructure. But the perils of ignoring the inevitable may cost more in the years to come.
The likes of Rajiv Lall and Deepak Parekh, heading IDFC and HDFC respectively, see this kind of growth potential from very close quarters. And they seem worried about the manner in which India will address the dual issues. Long bureaucratic delays have already postponed big ticket FDI projects. Some others are now unwilling to commit long term funds. We believe that our intention of balancing the quality of growth is noble. But the pace at which politics responds to economic needs at times impedes the long term interests of the nation.
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