It's a story that the old man tells with great relish. "And then there are these people on TV and the internet. They tell you that they have discovered a method of making 300 per cent a year on their investments and written a book about it. The book is free and they will send it to you if you just send them the shipping cost. You tell me, if someone has really discovered a way of making 300 per cent a year, would they be shilling for shipping costs on the internet?" he chuckles.
That's Charlie Munger talking about investment gurus that pop up with secrets to incredible wealth that they have discovered. The only thing is that for some reason, they are somehow unable to earn that wealth themselves and are therefore obliged to earn money by selling you the secret to making money. We've seen plenty of this in India, on TV and now a lot more in social media and in person. There are people who will give you guidance on quickly making a lot of money through investments but if you turn around and start wondering what is in it for them, none of it makes sense.
However, we don't normally do this. We don't try to step into the other person's shoes and try and see why that person is doing what he or she is doing. What are the motives there for the advice or the service that is being sold to you? It's a bit hard to believe in these days of continuous hard selling, but getting financial services used to be a favour that someone bestowed on the customer. For instance, there was a time - well within the memory of many of you reading this - when it used to be hard to get stockbrokers to do you the favour of executing your trade. This was the case till at least 1995 or so. If you were a new (or mere middle-class) investor, you could come up with the greatest investment idea in the country but you just may not be able to find anyone willing to be your broker. This could be arranged only through some connections. And even then, the broker would almost definitely skim a big chunk of your money (over and above the commission) because you had absolutely no way of knowing at what price your trade actually executed.
Those days are long gone but the battle is not over yet. It has simply shifted to a different front, a more difficult one. System-wide changes, which the government or a regulator or an institution can make, are mostly done. Despite the struggle, and despite the long years that took, those were the low-hanging fruit. Now, if you don't want to be treated unfairly, you have to take matters into your hand and improve your own knowledge and understanding.
This bit about knowledge and understanding is not a general motherhood statement. There's a specific issue here, which is very nicely illustrated by Charlie Munger's funny story: savers and investors need to understand how things work. Banking, insurance, stock markets and mutual funds look like black boxes to most of us. Therefore, we often don't recognise the motivations and goals of the people we are dealing with. Without a mental model of how things work, one can't deal with problems that arise. I read somewhere that when a car doesn't start on turning the key, most drivers turn the key harder, putting more pressure on it. Our mental model of what happens when we turn the key is completely wrong.
For most of us, personal-finance services are a hard thing to form a mental model of, certainly harder than cars. If we understand exactly how a service works - who is the provider, who is the seller, how they make money and how they will try to make more money, and especially where you fit into their scheme of things - only then we can make better decisions.
Some of you must be wondering about where Value Research fits into this. What mental model must you make of what we do. The answer is simple. The salespeople of financial products that pitch things to you appear to be in the business of giving you good advice but are actually earning from the transactions that they encourage you to make. There's a subterfuge right there. The more you invest, the more they earn. The incentives are quite clear.
Here, on this website, you can buy our books and magazines, and if you are interested in truly optimising your mutual fund investing, you can become a premium member. You could be investing a lakh or a crore or 10 crore, our deal is up front - the amount we earn is what you give us directly for our product. That's our model, and it's easy enough to understand!