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.

The Small Savings Schemes Conundrum

After the December monetary policy review, the focus is on small savings schemes yet again. In what has become an increasingly familiar trend, the Reserve Bank of India (RBI) faulted banks for not passing on benefits of rate cuts to consumers (read cheaper loans). On their part, banks continue to maintain that rates offered by small savings schemes are rather high. Broadly speaking, banks compete with such schemes while raising monies (fixed deposits et al); hence, the cost of borrowing become high, which in turn translates into a higher cost of lending (read expensive loans).

There seems to be consensus on the need to ‘rationalise’ small savings schemes; simply put, small savings schemes need to be made less attractive (typically a lower rate) thereby enabling banks to borrow at an inexpensive rate, and so on. But then, rationalising small savings schemes is easier said than done.

To begin with, there are political implications. Small savings schemes are perceived as (and to a degree rightly so) the layman’s investment avenues. Any attempt to make them less attractive could politically hurt the government. While on one hand, they run the risk of losing favour with citizens, on the other, it is easy to visualize the opposition hurling more ‘suit-boot’ jibes at the government :)  

Furthermore, there is some truth in the theory that small savings schemes are like the proverbial ‘silver bullet’ for a bulk of the population. The combination of low minimum investment amounts, safety (assured returns and protection thanks to a sovereign guarantee) and availability (sold through a vast network of post-offices and branches of select banks), truly make small savings schemes the layman’s investment avenue. Hence, tampering too much won't be a prudent choice. 

Clearly, authorities will have to adopt a middle-of-the-road approach. Here are some thoughts on what could be done:

To begin with, schemes that are targeted at specific investor segments such as Senior Citizens Savings Scheme and Sukanya Samriddhi Accounts will be left unchanged.

There is a school of thought which maintains that Public Provident Fund (PPF) scheme must be suitably modified. The popular scheme received a boost in 2014-15 when the maximum investment limit was increased to Rs 150,000 per annum (versus Rs 100,000 earlier). But I will be surprised if the authorities decide to tinker with PPF. Let’s not forget that retirement planning is yet to find its due acceptance in the country, and PPF features among a handful of genuine long-term investment products available to investors.         

To my mind, the Post Office Monthly Income Scheme (POMIS) and Post Office Time Deposits (POTD) will be put under the scanner. As per data from the RBI, as of Feb 2015, Rs 2,010 billion was invested in POMIS. This amounts to roughly one-third of the total corpus in all small savings schemes. Admittedly, there is a need for investment avenues that yield regular assured returns. Then again, both private and public sector banks offer products comparable to POMIS.  What sets the two apart is the rate of return; while POMIS offers 8.4% per annum, similar products from banks offer annual returns ranging from 7.25%-7.75%. It’s quite likely that the authorities will want to address the disparity.

Another aspect which is no less important pertains to the investor segment benefiting from the POMIS. It is an open secret that several affluent individuals have utilised the upper limit of Rs 900,000 available under joint POMIS accounts. Additionally, the monthly returns are invested in a Post Office Recurring Deposit account to further augment returns. Authorities will be inclined to correct this lacuna as well, thereby enhancing the prospects of POMIS being rationalised.

Then there’s POTD, the fixed deposit equivalents from small savings schemes. These deposits are offered in tenures of 1-year, 2-years, 3-years and 5-years. There’s a stark disparity between POTD rates (ranging from 8.4% per annum to 8.5% per annum) and those offered by bank fixed deposits. The popularity of POTD can be gauged by the fact that as of Feb 2015, monies parked therein (Rs 508 billion) accounted for roughly 8% of total assets held under small savings schemes.

It can be safely stated that by modifying two schemes (POMIS and POTD) which attract a bulk of monies, and leaving others unchanged, the much-desired balance can be struck.

There’s a thinking in some quarters that the way to rationalise small savings schemes is by virtually dismantling the structure, thereby ensuring that monies flow into banking channels. Such thinking is flawed to say the least. The small savings schemes framework serves an important function of offering investment options to the lay investor in the farthest corner of the country. The need of the hour is to create a level playing field between small savings schemes and bank products.