Investment Lessons from ‘The Godfather’

For film buffs and critics alike, ‘The Godfather’ embodies what celluloid magic is all about. Over four decades after its release, the movie continues to capture the imagination of audiences like no other, reaffirming its status as a classic.

But there's a lesser-known aspect of 'The Godfather'. Apart from being a source of inspiration to aspiring actors and filmmakers, the film has a lot to offer to investors as well. Following are investment lessons from ‘The Godfather’:

Barzini is dead. So is Phillip Tattaglia, Moe Greene, Stracci, Cuneo. Today I settled all family business

A laser-like focus on objectives and ruthless discipline in their pursuit, are defining traits of Michael Corleone’s personality. Be it protecting his family or safeguarding his business interests, Michael is decidedly aware of his goals and will do whatever it takes—sacrifice his career in the armed forces, join the ‘family business’ and even eliminate his rivals—to achieve his goals.

Similarly, investors would do well to set goals before they start investing. Goals can range from near-term ones such as creating a holiday budget, to long-term goals like a retirement kitty. Apart from making investing focussed, setting goals also helps in tracking progress. Thereby deviations (if any) can be easily rectified. Furthermore, being disciplined (read: curtailing wasteful expenditure, and investing regularly in line with a plan) will help investors stay on course to achieve their goals.

Some people will pay a lot of money for that information; but then your daughter would lose a father, instead of gaining a husband

Michael, a fugitive on the run in Sicily, is enamoured by a local girl. When confronted by her indignant father, Michael calmly reveals his true identity. Also, he lays out the options available, and the trade-off therein.

Likewise, while investing in market-linked instruments, investors must be unambiguously aware of the risk-return trade-off. For instance, a small-cap stock can deliver substantially higher return versus a large-cap stock; however, the potential upside comes at a price—higher risk, if the investment doesn’t play out as expected. Similarly, sector-focused mutual funds can outperform diversified funds, but they expose investors to higher risk. Hence investors must accurately understand the risk-return trade-off before making an investment decision.

Where does it say that you can't kill a cop?

When the Corleone family is under attack, Michael comes up with a seemingly outlandish plan that includes killing a corrupt police officer. His sound rationale wins over his sceptical associates. Essentially, Michaels’s willingness to think out-of-the-box wins the day.

At times, investors can be guilty of being orthodox in their choice of investment avenues. For example, some invest only in bank fixed deposits and small savings schemes because of habit rather than choice. By refusing to consider other apt options, investors run the risk of not meeting their investment goals.

For instance, an investor in his twenties who is saving for retirement 30 years hence, shouldn’t hold a portfolio comprised of only fixed deposits and bonds. Equities and mutual funds must find place therein. Remember, risk in itself isn't bad; rather, investing without being aware of it, and/or failing to correctly assess it, gives rise to thorny situations.

It's not personal. It's strictly business

Every character quoting this legendary line tries to convey that a given action should be seen as a business decision i.e. in a dispassionate manner. In other words, it has nothing to do with personal feelings. The 'not personal' part holds good for investments as well.

At times, investors get 'attached' to their investments. This is especially true of stocks and mutual funds that have had a successful run. The trouble starts when the investment avenue is no longer equipped to perform as it has in the past. Then there are misguided investments which fail to deliver, but investors hold onto them, hoping to ‘get even’.

This approach to investing is unwarranted. An investment is simply a means to an end i.e. the investment objective. If a thorough evaluation suggests that the investment is no longer equipped to play the part that it was supposed to, investors must salvage the situation by exiting the investment at an opportune price and time.

Tom Hagen is no longer consiglieri 

While expanding his operations, Michael sacks his adoptive brother/long-time associate, Tom Hagen from the post of consiglieri (adviser). Stating that Tom isn’t a wartime consiglieri, Michael replaces him with someone adept at strong-arm tactics, since the situation demands it.

Barring a small section of investors who can manage their own investments, others need assistance in the form of investment advice. Investors have a variety of options—distributors, advisers, robo-advisory firms—to choose from. Quality of investment advice can and does have a bearing on investment results. Hence, investors must perform rigorous due-diligence before engaging an adviser. Also, there is a case for reviewing the adviser’s performance at regular time intervals.

I'll make him an offer he can't refuse

In Godfather parlance, this iconic line represents a veiled threat. Refusal to comply with the offer can lead to dire consequences.

In the world of investments, there are periods when markets are frothy and irrational exuberance is the order of the day. In such periods, it is not uncommon for investors to encounter investment propositions that claim to offer a win-win proposition. For instance, an investment that offers high return with virtually no downside. That’s when investors must remember that if the 'offer' sounds too good to be true, then it probably is.

Investment tips from 'The Godfather'

For film buffs and critics alike, The Godfather pretty much embodies what celluloid magic is all about. Even 37 years after its release, the movie continues to capture the collective imagination of audiences across the world. Its characters, lines and performances are a part of folklore. Debates and discussions on what makes the movie tick continue till date. The film's enduring appeal to generation after generation only reaffirms its status as a true classic.

But there's a lesser-known aspect to The Godfather. Apart from being a source of inspiration to aspiring actors and filmmakers, the film has a lot to offer to investors as well. Following are 3 investment tips from The Godfather:

1. "Where does it say that you can't kill a cop?"

When the Corleone family is under attack, Michael Corleone (Al Pacino) comes up with a seemingly outlandish plan to eliminate his family's enemies. And that includes killing a corrupt police officer. Despite being scoffed at by his associates, Michael rationalises his plan by suggesting that they feed the media with stories of the police officer's corrupt practices and his links with the mob, and thereby defame him. Essentially, Michael shows the willingness to think out-of-the-box and take risk, without being irrational.

Likewise, the willingness to be unconventional and take on risk is vital for successful investing. Often, investors are guilty of sticking to certain avenues simply because they have always done so. For example, it is not uncommon to find investors who refuse to venture beyond bank fixed deposits and small savings schemes; the only explanation for their choice being, we have always invested in these avenues. By shutting the door on other options, investors might deprive themselves of the opportunity to meet their investment objectives. Of course, this should not be read as a recommendation to throw caution to the winds and invest in every untested investment avenue on offer.

All investors need to do is, be open to the idea of investing in avenues that offer a suitable investment proposition and be willing to take on acceptable levels of risk. For instance, a 25-Yr old investor who is saving for his retirement 35 years hence, can't hold a portfolio comprised of only fixed deposits and bonds; despite the higher risk, equities and mutual funds must find place therein. Remember, risk isn't bad; investing without being aware of it or failing to properly assess it, is what gives rise to thorny situations.

2. "It's not personal. It's strictly business."

This recurring line from the film has been used to great effect on each occasion. Every character who quotes this legendary line tries to impress on others that a given act or plan of action should be seen as a business decision. In other words, it has nothing to do with his personal feelings. Hence, the need to view the act in a dispassionate manner. The 'not personal' rationale holds true for investments as well.

At times, investors have a tendency to get 'attached' to their investments. This is especially true of market-linked avenues like stocks and mutual funds that have had a successful run. The trouble starts when the avenue is no longer equipped to perform as it has in the past. Similarly, there can be a situation wherein an investor gets invested in an avenue that fails to deliver. In both the situations, investors might be tempted to hold on to the investment; while in the former, it's the 'attachment' at work, in the latter, it's to get even.

Such an approach to investing is certainly unwarranted. An investment is simply a means to achieve a goal i.e. the investment objective. If a thorough evaluation suggests that the investment is no longer equipped to play the part that it was supposed to, investors must salvage the situation by getting rid of the same at an opportune price and time.

3. "Tom Hagen is no longer consiglieri."

When Michael decides to expand the family's operations, he decides to make certain changes. The significant one being that his brother/long-time associate, Tom Hagen (Robert Duvall) is sacked from the consiglieri's (advisor) post. His explanation for this rather drastic move is quite simple - Tom is not a not a wartime consiglieri and that things could get rough. Simply put, Michael prefers someone adept at strong-arm tactics over his brother, since the situation demands it.

An investor should routinely evaluate his relationship with the investment advisor/financial planner. The onus to ensure that investments are made and managed in the best interests of the investor, lies with the advisor. In effect, the investment advisor's integrity and competence are consistently tested.

Let's consider the emerging scenario in the mutual fund industry. With entry loads being scrapped, investors will be required to individually compensate advisors for services rendered. There can be a situation wherein an investor believes that his advisor isn't able to justify the fees demanded or perhaps his service standards aren't up to the mark. Should such a situation arise, investors shouldn't hesitate to terminate their existing relationship. Investing is serious business and there should be no room for incompetence or a slack attitude on the advisor's part.

Finally, be wary when someone "makes you an offer, you can't refuse". In The Godfather, this phrase refers to a veiled threat; refusal leads to dire consequences. In the world of investments, one can draw a parallel to investment propositions that claim to offer a win-win proposition. For instance, an investment that purports to expose investors to low risk, yet promises to deliver high returns. Remember, if an investment proposition sounds too good to be true, there's more than a fair chance that it is.