Property and stock investing

A reader writes:  Our family read “Why we invest poorly” (May 20, 2016) with interest.  I agree that biases stop us from thinking wisely about stock investments, so we prefer to put our money in property or real estate.  Do you think this would save us from the problems you described?

My reply: Confirmation bias and risk aversion are just two of the cognitive and  emotional biases that psychologists have discovered in the last decades. With confirmation bias, we tend to hold on to what we believe, and we try our best to ignore information that is contrary to what we believe in.  With risk aversion, we would avoid risk at any cost, even if we lose money in the process.  Would investing in property (not equities) make things better?  If you keep emotions out of it, perhaps.  But this is easier said than done.

Take the case of an extended family who decides never to sell their ancestral home, as a sign of respect for the founder.  However, after half a century, even with caretakers living in the house, the mansion is in disrepair, with termites eroding the foundations.  Millions have been wasted trying to salvage the house, which remains a fire hazard, among others.

The wisest move would be to sell the property.  For during the last several typhoons, the area became flooded, with house prices going down as a result.  The family is still holding on, doing repairs as needed, even if they know they should sell the house, even at a loss.

Financial fears

A reader writes:  My husband and I have tried investing in the stock market, but we keep losing money.  We tried a broker, but it was no better, we even had to pay him fees even if he lost our money.  It is not easy to earn money, but it is so easy to lose it.  What should we do?

My reply: I am not a financial adviser, and my training as a mathematician tells me to treat stock picking with care, and like a gamble:  to invest only the amount of money I can afford to lose, to minimize regret thereafter.

But just saving your hard-earned money is already a losing proposition in itself.  Do the math, or ask a friend (not your broker) to do it for you.  If you place your funds in a savings account, or even in a time deposit or a government bond, the returns might not be good enough to beat not only inflation but also to take into account the taxes paid on even the most miniscule gains from savings interest.

Making money grow is not an easy matter, whatever financial gurus would have you believe.  Everyone who has ever invested in stocks (even the legendary Warren Buffett) had been on the losing end at one time or the other.

Think of your losses as valuable feedback.  Why did you make the wrong decision?  Were you blinded by the biases previously discussed?  Did you buy it from a friend’s recommendation?  Or (hopefully not) on your broker’s advice?

Never experiencing a loss is impossible.  In the long run, the trick is to make sure that your losses are a lot less than your gains.

Get “Stock Market 101,” “Investing for Dummies,” or books that give you the fundamentals.  Stay clear of books that promise you instant wealth, or those that just look too good to be true, because they usually are.

Financial literacy

A reader writes:  Many Filipinos are not financially literate, and schools should start teaching this.  What do you think is the main reason why we teach math but not financial    literacy?  Which countries in Asia have financial literacy in the curriculum?

My reply: Japan, Indonesia, China have incorporated financial literacy in math class, which in our new K-12 curriculum, would also be done.  But I am not certain how many teachers in basic education are themselves comfortable with finance, so unless they are trained extensively (not in a week or two, as is usually the case), financial literacy might remain good on paper, but not implemented well.

But this matter is too important to be left to the schools.  Parents should teach financial literacy.  Have your children save for a toy rather than asking for it.  Have them analyze utilities bills and their relationship to home consumption.  Have them compute how much to save today for them to go to the college of their dreams.

Queena N. Lee-Chua is on the board of directors of Ateneo de Manila University’s Family Business Development Center.  Get her book “Successful Family Businesses” at the University Press (email [email protected].)  Email the author at [email protected].