a better version of this appeared recently in moneycontrol – in their wealth section…

Shiva Garru of Hyderabad told me a story really difficult to believe, amusing for the readers and sad for the participant.

His father in law had invested in fixed deposits and lost money, where as his father had a lot of money in equity shares of Satyam and lost money. So Shiva concluded that investing is risky. In fact he was a little excited and said investing with ‘Raju’ is risky! I explained to him that not investing is equally risky – risk of inflation too!

Let us cut to the story. Shiva’s father-in-law had kept almost all his money in Nagarjuna group’s fixed deposit and had by now lost all hopes of getting it back from the company.

I reminded him the story of the 3 pigs and a wolf.

There were 3 pigs that needed to build a house for themselves. A house is supposed to protect you from the vagaries of nature and make you feel safe, right?

The first pig built a house of straw. The wolf came – huffed, puffed and the ‘house’ came down. The wolf got the pig for dinner.

The second pig built a house of wood. The wolf came, huffed, puffed and the house came down. The wolf got the pig for dinner, again!

The third pig realized that the problem was not in the quality of material used in the construction, but in the enemy – the wolf! So he constructed a house of stone and cement and invited the wolf through the chimney. He had kept a pot of boiling water at the fire place and made sure that the wolf was killed.

GETTING RID OF RISK / MANAGING THE RISK is what the 3rd pig did.

Similar is the investment story. The risk for Shiva’s father and father in law did not come from the Rajus! It came from their own understanding of risk. That is exactly what Warren Buffet says. Risk comes from ‘not knowing’ what you are doing.

If all investors know their own financial goals, risk profile, understand their severe limitations in stock picking, accept that portfolio construction cannot be learnt by watching television or ‘googling’ they will become better investors. If you cannot beat the index while investing on your own (like how most of our fund managers cannot), just put your equity portion in an equity index fund, a portion of your short term debt allocation in an income fund, a gold etf, and in government schemes for longer term debt.

You will do far better than many fund mangers. While investing it is all right if the world thinks you are a pig – remember the third pig lived to tell the tale!