The Wealth Wallahs

by Shreyasi Singh

  Second, on innate risk appetite, they differ substantially from the traditional wealthy, especially those from the third, fourth or fifth generation. Atul Singh, managing director for the Indian practice of Julius Baer, a global Swiss private bank for private and institutional investors, said their general risk appetite was higher. Often, they were younger too.

  More and more, as new-age internet and consumer technology companies scale up, the nature of the first-generation super-rich has changed too. For one, the average age has come down. Nearly half of the ultra-high net worth individuals (UHNIs) are below forty years29.

  Zooming on the risk highway

  Because of their risk appetite, and especially when they are younger and have a longer time horizon to work within, the first-generation wealthy chase growth rather than just focusing on maintaining asset levels, Singh says. Also, they weren’t just looking to protect their capital. They needed it to grow in their lifetime, to be used for their future generations and to fund new ventures and businesses — much like Raghav Bahl or even TaxiForSure’s Aprameya Radhakrishna who has decided to invest over 20 per cent of his wealth in start-ups.

  First-generation entrepreneurs’ can-do attitude has evolved from the fact that they have seen their lives change within a decade or so, if not years. Their focus on wealth creation comes from the greater ambition and aspiration levels consolidating across India as well as a belief that dreams can come true. Lives can change.

  ‘These people have a strong belief that yes, you can create a fortune, even a large fortune, and that there are various sources through which you can do it,’ says Shiv Gupta, founder and CEO of Sanctum Wealth Management, a start-up that acquired the private banking business of the Royal Bank of Scotland (RBS) in September 2015 for a reported 200 crore, in a unique management buyout. Gupta used to lead the RBS private banking business.

  In contrast, inheritors understood that creating family wealth was a generational game that came from patience and prudence. They knew growth eventually followed protection: As long as their corpus was protected, it would lead to a growth in their assets. Swiss private banking was based on this notion, best explained by the term l’dor va’dor or literally from “generation to generation”.

  For example, the evocativeness of Patek Philippe’s advertising campaign — that captures the emotion of the expensive watch being a family heirloom passed down from generation to generation — didn’t resonate as much with the first-generation wealthy, more focused as they were on the now.

  In old, affluent families and business houses where wealth continues to get distributed between different members of the family across generations, lies an overriding anxiety around the fragmentation of wealth. This also leads to a greater focus on wealth protection and preservation and, consequently, a very conservative approach to managing the same.

  The traditional wealthy are also more resistant to outsourcing their portfolio. They usually have a trusted accountant who looks after their company’s treasury and an informal family-office setup that may offer a contrarian view of what external wealth managers recommend, creating a layer of friction that makes getting customers such as these onboard difficult.

  In contrast, the first-generation wealthy are more inclined to give professional firms a chance and listen to their ideas.

  The flipside of this open-mindedness, some believe, is their inherent confidence, especially because they’re usually successful business builders. This confidence leads to a higher propensity for risk, most evident in entrepreneurs whose pace of wealth creation has been accelerated.

  The dangers of ambition

  So, if the wealth has been amassed by the time they’re forty, not only do its creators have greater confidence in their own decisions, they also know they have a huge chance to replicate and multiply their corpus because their age gives them a longer runway to create more wealth.

  Thus, they are more opportunity-driven and will look for product ideas that can deliver the expected returns. Having built successful companies, they witnessed an exciting phase where their equity holdings in their companies have multiplied substantially. They’re, therefore, unlikely to be happy with sustained returns of 10-12 per cent. Also, because they believe they are plugged into the global information flow, they are confident of making smart decisions that are both adjusted for risks and offer high returns. However, it’s a confidence that isn’t always justified.

  ‘People want high returns because the cost of capital is high in India. The good thing is — the economy supports taking high risks. Risk is rewarded right now,’ says one of India’s most successful stock market investors who, because he is notoriously media-shy, refused to be quoted in the book.

  In his experience, an understanding of risks differentiates old and new wealth. ‘The new wealthy sometimes take risks without really knowing what the possible risks are. The old wealthy take risks too but they have a better sense of what could go wrong.’ A lack of preparation isn’t affecting people now, he adds, because India is going through so much growth.

  The confidence that many ambitious first-generation entrepreneurial clients across Asia have is that they think they can achieve higher investment returns than the market average, says Hubbis’ Michael Stanhope. ‘But this is usually not possible. There is too much proof that it is very difficult to consistently outperform the market,’ he told me.

  There are others who believe that wealth managers and financial advisors are partly to blame for this because they initially promised unrealistic, market-defying results to clients. Today’s wealth managers must re-educate the client on the new reality, and get them used to tempered expectations and realistic returns.

  Stanhope says that in the Indian wealth management and private banking industry, “fiduciary responsibility” is a concept too few people understand.

  Neither clients nor financial institutions talk about it but moulding client expectations and behaviour to make them appreciate achievable returns is a starting point.

  Wealth managers I spoke to say that talking about normalised return is not an easy conversation to have with ambitious clients because so much has gone into how a client views risk. Too many psychological factors impact their investment decisions and clients influence outcomes as well.

  ‘Some clients do have unreal expectations. Even if they say they would rather have moderate returns and zero risk, they are rarely happy with moderate returns,’ IIFL Wealth’s Karan Bhagat says.

  Also, while it is true that the industry has a fair number of advisors who encourage this kind of thinking, there are enough professionals — them as well as others — who also challenge these goals, he believes.

  Smart investing and managing money is as much, if not more, about psychology and behavioural biases as it is about market intelligence and product education. The way entrepreneurs live and operate makes them ambitious, aggressive investors with a higher appetite for risk. Because they have often seen an exponential increase in the value of the equity they hold in their companies, as investors too their expectations are spiced up by a soaring optimism, impatience for robust growth and an eagerness for their financial advisors to show them products and ideas that constantly beat market returns.

  A senior private banker in Mumbai, who advises several new wealthy clients, laments that it’s often an uphill battle to convince his clients to be satisfied with sustained 15 per cent returns and that the bull run of the 2003-2007 phase was an aberration that is not going to come back. Clients are more focused on knowing the returns they are likely to get than in understanding the risks they are taking, he adds. Their impatience for unreasonable returns and firm optimism, that has convinced them that opportunities for massive returns exist is striking.

  Unlike the math and logic people might believe are involved, managing one’s wealth is a behavioural, attitudinal game. The notion that economic rationale always dictates behaviour is foolhardy to believe. Inherent personal characteristics play a critical role in
how individuals approach this. It’s why decoding entrepreneurs’ attitudes and traits gives us a clearer picture of why they exhibit them.

  The diminishing returns of optimism

  Few of us consciously diagnose our optimism appetites, or understand how it moulds our decisions, both in business and life. Yet, the degree of optimism we deploy plays a huge role in how we work, live and invest. As humans, being optimistic is hardwired into our brain.

  Neuroscientist and author Tali Sharot, who has been researching the “cognitive illusion” in her Affective Brain Lab at University College London, says that 80 per cent of the people experience this cognitive bias30. Her findings show that people have a tendency to overestimate the likelihood of good things happening to them as well as believe that they are less at risk of experiencing a negative event compared to others.

  ‘For example, individuals underrate the chance of getting divorced, being in a car accident or suffering from a major illness, while they expect to live longer than others, overestimate their success in the work force and believe that their children are especially talented,’ Sharot says in her book, The Optimism Bias: A Tour of the Irrationally Positive Brain.

  When it comes to entrepreneurs and business builders, their abundant optimism bias is often their most potent tool, the power that fuels their “can-do”. It gives them the ability to articulate a new future, a new possibility and a new way of doing something, even when the odds of survival, let alone success, might be limited. Entrepreneurs, Sharot writes, are generally more optimistic than others, and they become even more optimistic as a consequence of being entrepreneurs.

  So, does the brand of strident optimism that one marshals as an entrepreneur transfer successfully to the world of investing?

  A research paper published in the Journal of Financial Economics in 2007, and written by Manju Puri and David T. Robinson, concluded that although more optimistic people worked harder, expected to retire later, invested more in individual stocks and saved more, extreme optimists could display financial habits and behaviour that are generally not considered prudent.

  Entrepreneurs don’t hedge their bets: They work on an “all-in” model. Their time, opportunity, capital and risks are all vested in one entity, the ventures they have founded. Smart, prudent investing, on the other hand, often calls for quite the opposite — careful diversification across different allocations, studied patience and preferably a higher aversion to risk.

  Optimism can interfere with this, becoming a threat to watch out for and guard against. I remember a Skype conversation I had with Sharot where she says that when confronted with actual data that might be contrary to their plans and objectives, very optimistic entrepreneurs are likely to dismiss the data.

  Entrepreneurs should understand that it isn’t always true that the more optimistic you get, the higher your chances of success. At some point, the success-optimism relationship starts moving in reverse.

  Ben Carlson, an independent wealth manager in the United States, who also runs a popular blog on financial markets and investor psychology called ‘A Wealth of Common Sense’ writes that one of the most important aspects of being a good investor is becoming a financial historian.

  ‘You absolutely have to learn about the history of the financial markets if you are ever going to be able to control your emotions and behaviour when making decisions about the future. Of course looking back at historical performance data of any asset allocation strategy has absolutely no bearing whatsoever on future returns. You cannot make the assumption that future performance will follow the same exact path as past returns. One of the biggest mistakes investors make is using the recent past to shape their investment stance by chasing past performance. But this doesn’t mean that we discard historical results altogether just because they can’t be used to make perfect market forecasts.’

  In another post, How Our Memories Shape The Market Cycle, Carlson, talking about the 1929 Crash and the Great Depression that followed, as well as the 2008 Global Financial Crisis, writes that market crashes left the most indelible memories on investor psyches.

  ‘The way I see it, there were three basic lessons that most investors took away from the 2008 crash and its aftermath: (1) Some people learned that they can’t handle investing in stocks after seeing two crashes during the same decade and have more or less given up investing in the stock market. (2) Others learned that the markets seem to always come back and have conditioned themselves for that response. (3) Still others learned nothing because it’s very easy to sweep your mistakes under the rug.31’

  He pulls up a quote from tennis player Andre Agassi’s book, Open: An Autobiography, where the American player talks about the pain of losing.

  ‘But I don’t feel that Wimbledon changed me. I feel, in fact, as if I’ve been let in on a dirty little secret: winning changes nothing. Now that I’ve won a slam, I know something that very few people on earth are permitted to know. A win doesn’t feel as good as a loss feels bad, and the good feeling doesn’t last as long as the bad. Not even close.’

  Carlson writes Agassi’s words have captured what wise investors should know: That there aren’t many lessons learned during a bull market because everyone thinks they’re a genius. It also feeds the “power of loss erosion” — essentially anxieties that people feel because they remember what a market crash feels like and it’s always at the back of their mind.

  Many wealth managers said that the first-generation entrepreneur in India showed little symptoms of the “power of loss aversion”.

  HDFC Mutual Fund CEO Milind Barve, in fact, says it is surprising how easily people get over bad experiences when things got better; that, at most, people remember the stock market turbulence of 2007-2008 but in the case of the young, first-generation wealthy, even that isn’t a salient, deep memory because many weren’t big investors at that time, or had little exposure to the markets then. Their optimism is unhindered by these market cycles because they haven’t seen big down-cycles yet.

  The professional rich cut a slightly different picture. Since their journey to wealth has not been paved by massive risk-taking, they exhibit a lower tolerance for risk as compared to first-generation entrepreneurs. The professional wealthy also have concerns and aspirations that are classically middle-class; the math in their head is largely about children’s education, a nicer home and post-retirement comforts.

  In fact, they best demonstrate the uniquely Indian model of savings (income-savings=expense, not income-expense=savings). This safe mode of creating wealth gradually — without taking seemingly huge risks or relying on a sudden infusion of liquidity — primes them for a generally more systematic, sustained and realistic approach to managing wealth.

  It can also lead to making difficult choices.

  Chapter 10

  The anatomy of choice

  In April 2012, Subodh Gupta, a Delhi-based industrialist, sold 75 per cent stake in his company, Triveni Polymers, a plastic containers manufacturing unit that his father had founded in 1979. It went for a reported 200 crore ($30 million) to Germany’s Gerresheimer AG, a specialist in advance glass and plastic products.

  Gupta, who continues to manage the business after the acquisition, says he sold the company that had a turnover of 140 crore at the time, because he could see his children — two daughters who are in college and a younger son still in school — were unlikely to be interested in running a manufacturing unit. His elder daughter studies in a design school in the United States. As an only child, Gupta doesn’t have siblings, or their children, who could have taken over either.

  ‘I started thinking that if something happens to me, who will run the company? How do I de-risk the family from being in that situation,’ he reasoned at the time of making the decision.

  Once the Gerresheimer deal came through, the family, expectedly, experienced a large infusion of wealth. Gupta says that because the transaction was motivated by an urge to build a legacy and capital base for future generations, he hasn
’t spent even a penny of it to either add to his lifestyle — to acquire or indulge in any personal assets. His objective of both growing and protecting the wealth led him to actively engage with his financial advisors — IIFL Wealth.

  ‘We have evolved our asset allocation over time: We are in equity, debt and real estate products. When I started in 2012, I was much more invested in debt products and equities were only 10-12 per cent of my portfolio. Then the market started changing,’ Gupta tells me.

  ‘By the beginning of 2014, I told Karan to start increasing our equities exposure because I realised that is the only asset class where you can grow your money now. I decided to invest the money I didn’t need in the next five to ten years in equities. Equities now make up about 40 per cent of my entire portfolio. Debt is about 35 per cent and the rest is in real estate,’ he explains.

  When it comes to managing wealth, more and more people, like Subodh Gupta are realising that the prime strategy lies in understanding asset allocation. Gupta’s relationship managers at IIFL Wealth said he was great to work with because he approached managing his wealth and portfolio through this prism.

  How you allocate wealth is the key to meeting the objectives one has laid out, wealth managers say. Asset allocation — how you divide the entire corpus of your wealth to balance risk and reward across asset classes such as equities, fixed-income, physical assets (gold and real estate), cash and other alternative investments — will determine, more than anything else, the returns on your wealth. A smart asset allocation will be diversified and will take into consideration an investor’s risk appetite, time horizon and wealth objectives.