Tuesday, 5 February, 2008

Risk appetite and the surgeon

This Monday's (4 Feb 08) Times of India has an article by financial advisor Gaurav Mashruwala titled No books or periodicals offer you a theory on risk appetite and investment. I wish I could get a link to it's online version, but I can't find any.

Anyway, according to Mashruwala, “'Advising investor based on their risk appetite' is the biggest humbug coined by financial distributors to 'sell' higher commission products.”

He goes on to draw a parallel between financial advisors and surgeons, explaining that 'the way whether to perform surgery or not has to be decided by the surgeon, similarly an investor should invest in equity or not has to be decided by the advisor... Recommendations should be solely dependent on investor's future financial goals. It has nothing to do with his or her risk appetite.'

He's particularly against questionnaires framed to gauge investors' risk appetites.

Humm... I suppose Mr Mashruwala is absolutely right in everything he says about risk appetite. Nonetheless, I beg to differ on the parallel.

First, money is not a matter of life and death. The surgeon is responsible for something far more precious that any financial planner will ever be. The level of trust necessary between a surgeon and his patient is - and should be – many times higher than between a financial adviser and his customers. To expect otherwise is to set oneself up for disappointment.

Second, major surgery is always carried out by a team of experts, each with deep knowledge and experience in his area. The team uses the best technology available. All conditions are strictly controlled, before, during and after surgery. A series of tests are carried out too. Besides, there are trained nurses and attendants to look after the patient.

Often, there is little risk in surgery. The cliché that the 'operation was successful but the patient died' is not an oxymoron. The surgeon most probably knew the patient's chances of survival (even if the operation was successful) before the operation, as did the patient or his dear ones. (A small point here: If I know my chances, the nature of risk is quite different from that in a situation where I cannot quantify or otherwise estimate [much, little, medium] my chances.) In fact, so rarely do things go wrong nowadays, that when they do, the patient's relatives suspect malpractice and negligence and beat up the surgeon!

Such is not the case with investors yet, is it? Or are we in the Age of Endless & Universal Prosperity already?

Third, surely one of the principal reasons for investing is to feel financially safe. If investing makes the investor very insecure, it sort of defeats the purpose, doesn't it? It's like going to a gym to break your back.

Fourth, Mr Mashruwala assumes all cases that every surgeon deals with are ones where the patient's only choices are between (a) taking the surgeon's advice to be operated on and (b) dying. This is hardly the case in the real life.

In many cases the surgeon says, “Look, this can be completely cured by surgery, but if you're not particularly keen on an operation, that's ok too. Though you'll have to take medication for ever. Your problem won't kill you, just bother you, even when it's under check.” In such cases, the surgeon does accept his patient's lack of 'surgical appetite' (his term).

But I'll never have enough money to need Mr Mashruwala's advise or that of any financial advisor. So why do I bother?


mb said...

Well, this is quite a controversial topic already but with no offense, if you look into the depth of the meaning of Mr.Mashruwala, he is probably comparing the Retail Investor(similar to a dying patient) with the forever crashing Sensex and Stock Market whilst the Surgeon is here is similar to the Financial advisor advising him to let him take charge instead of dying in the market. The ironical point is that the patient (retail investor) does not know whether the market will further crash or take him to 'heaven'(pun intended); but the financial advisor(doctor saab) has better knowledge and know-how of how to deal with such a critical situation.

N&P said...

First, thank you for leaving your comments.

Second, do tell us a bit about yourself? Do you have a blog or site too?

Third, my principle problem was with the parallel, and not the advise. Though I don't like the advise too. I'd rather stay in control and poor, than hand over my money and become rich. I suppose that's what 'risk profile' is all about - the irrational part of making money.