Tri-Ratna applied to Investing: what we can learn from our culture?

By: Chetan Shah, CFA, Director, IAIP

सम्यग्दर्शन-ज्ञान-चारित्राणि मोक्ष-मार्ग:| तत्वार्थसूत्र

Right Faith, Right Knowledge, and Right Conduct Leads One to Moksha. Tatvartha Sutra

The definition of Moksha differs across philosophies. Here it means liberation of soul from the clutches of matter and particles of karma. Accordingly the definition of right faith, knowledge and conduct are those that help you achieve liberation from the cycle of birth & death.

In any field of human enterprise to achieve the goal or objective one needs to have right type of faith, knowledge, and conduct. Applied to the field of investing, the ultimate goal is to achieve good long term risk adjusted returns for the investors and meet their investment objectives.

Right faith…

There are times when you find lots of people telling you that fundamentals do not work, technicals do not work and so on. So I keep wondering why do these people work in the field in the first place? If one does not believe in the concepts how can one ever apply those and do justice to the clients? There are times like the tumultuous 6-7 months starting September 2008 when the confidence of even the best and brightest of professional investor is shaken. And they start doubting about the system, markets, concepts, principles, experts, leaders, corporate executives and themselves.  Yet these are the times when people with deep and right faith, right beliefs can take advantage of the distress & indiscriminate selling. I remember how the mood was gloomy at the CFA Institutes’ Annual Investment Conference in Orlando during April 2009 what with experts who had correctly predicted impending crisis taking center stage and addressing plenary sessions. The mood was different at Berkshire Hathaway annual general meeting in May 2009 with record 35,000 investors attending and Warren & Charlie bubbling confidence – America comes back, it always comes back. They had the right faith and believed in what they were doing!

Right Knowledge…

Once the faith in capital market structure & mechanism is established, one has to find out what works. And there are number of books on securities analysis, valuations, forensic accounting, portfolio management, regulations etc. available. Add to these market research and sector reports prepared by various industry associations, public institutions and private agencies. Courses like the CFA charter prepare individuals to take on roles of portfolio & investment managers after laying the foundations on securities analysis and valuations across equities, fixed income and derivatives. While practicing as portfolio manager or analyst one learns about numerous businesses, industries & their structures, competitive management strategies, number of economic & industry statistics both historical and forecasts. One is also supported by analysts and experts from various fields to derive appropriate conclusion and judgment. However, one has to realize that there is no end to getting information, which sometimes is costly to get or is not timely or is simply not available as in case of internet or m-commerce start-ups currently in India. Hence understanding the business and concentrating on few critical drivers of earnings & cash flows is the best solutions in an otherwise dynamic economic and business environment across the globe. And keeping regularly updated on the same.

Right Conduct…

Right faith and Right knowledge has to be followed by Right Conduct and Action for the results to be achieved. Applied to investment field, right conduct means that client’s interest, fiduciary duty and ethics are kept ahead of any other parameter in the investment activity. One may be the smartest person in the field but if those skills are not used for the welfare of clients or investors or society at large or used for duping them then it will lead to breach of trust, loss of reputation and loss of business. Right conduct is one which should lead to trust. Again, you have situations when lots of deliberation has taken place on a company and its securities, arguments put forth in favor for adding the security in the portfolio and against it, additional data points collected to satisfy the skeptics, valuation models compared and so on. And yet the final decision is left hanging. In the meantime the price of the security have started moving up steadily or at a rapid pace. And people who were in favor start having feelings of “missed opportunity”. Lack of action means no participation in the upside. Hence for achieving success the combination of all the three – right kind of faith, knowledge and conduct – called Tri-Ratna or Three Jewels is necessary.

–        CGS