Thursday, Dec 21 2023
Source/Contribution by : NJ Publications
Over the course of time, certain things have proven to be universally true in different situations. With time, such happenings have taken the shape of universal laws that speaks of wisdom and experience. Such universal laws are true not just in general situations but also in the context of personal finance. As investors, we can be open to learning from these universal laws to better prepare and navigate our own investment journey. In this blog, we will delve into some of the universal laws and explore their relevance in the context of personal finance.
1. Murphy's Law: ‘Anything that can go wrong will go wrong.’
Murphy's Law is a stark reminder that unforeseen events can disrupt even the most meticulously crafted financial plans. Experienced investors recognize the importance of risk management and diversification. Establishing an emergency fund, securing insurance coverage, and adopting a resilient mindset are crucial components of navigating the unpredictable nature of life and markets.
2. Kidlin's Law: “If you write the problem down clearly, then the matter is half solved.”
Quite often, we are not clear what we need and want in life and when and where we plan to reach in our financial journey. This law lays importance on the need assessment - clearly defining your goals and financial objectives before you start investing. A proper financial plan can be a document where our financial goals can be clearly defined with specific dates, target amounts and the path to achieve the same can then be easily worked out.
3. Gilbert's Law: “The biggest problem at work is that none tells you what to do.”
The idea here is simple - take ownership in a world that is constantly evolving and changing. It is important that we develop our own understanding and knowledge as we learn to navigate our investment journey and not really depend on others to tell us what to do. The law also implies that we have to keep an eye out for changes happening around us and adapt our investment strategies in order to capitalize on emerging opportunities and navigate potential risks.
4. Wilson's Law: ‘You can't win if you don't play.’
This simple yet profound law encourages participation and taking action, even when faced with uncertainty or fear of failure. We can see this law in the context of long-term wealth creation by participating in the equities, especially in a market like India. To emerge successful, we must play the game of patience, discipline and give time for the power of compounding to work in our favour and help us win in the investment game.
5. Falkland Law: 'When there is no need to make a decision, Don't make a decision.'
Not making a decision is also a decision. In the personal finance context, it is essential to avoid the market noise and short-term fluctuations and not be forced to make decisions based on the market’s herd behaviour. In the journey of building wealth, it is important that you do not change lanes too often and avoid unnecessary changes and decisions that are not in alignment with your long-term objectives and not logical or rational in nature.
6. Newton's Law: “Every action has an equal and opposite reaction.”
A very popular law simply means that whatever you decide or say yes means you have said no to many other choices. Every financial decision carries a potentially long-term impact on our wealth building journey. A delayed investment, a lower amount of SIP, not growing your SIPs, investing in FDs instead of equities, spending on latest gadgets and so on, carries both positive and negative outcomes if you consider the opportunity costs involved in every such decision or financial behaviour.
7. Walson’s law: “Put information and intelligence first, and money will come rolling in.”
For investors, Walson’s law would mean that one has to keep growing knowledge and expertise and practice this repeatedly in the investment journey. The outcome of this practice, and behaviour will ultimately yield positive results in the wealth creation journey.
8. Parkinson's Law: “Work expands so as to fill the time available for its completion.”
Parkinson's Law can be seen as a warning against lifestyle inflation, unless it is controlled. It is very often seen that our expenses rise to fill the rising disposable income with time. One needs to control this by regularly diverting a large portion of this rise in income to investments in a disciplined manner so that your increase in investments is higher than your increase in your spending.
9. Hofstadter's Law: “It always takes longer than you expect, even when you take this into account.”
Hofstadter's Law highlights the tendency for tasks to take longer than initially anticipated. In the context of personal finance, this is a reminder that achieving financial goals requires time, persistence and patience. In today’s world, expecting that your money will continue to grow at an unusually high rate for the foreseeable future is foolish. There is a need to be conservative, have a comfortable margin of safety in terms of your expectations - both time and returns, and plan accordingly to ensure that your goals are safe, and your plans have a high probability of success.
10. Sturgeon's Law: “Ninety percent of everything is crap.”
Sturgeon's Law serves as a reminder to exercise judgement and discretion in the world of investments. Experienced investors understand that not all opportunities are created equal, and thorough due diligence is essential. By filtering through the noise and identifying the right investment opportunities, they can build a resilient and profitable portfolio. This law reinforces the importance of quality over quantity in the pursuit of financial success.
Conclusion
Learning and wisdom can be found anywhere, beyond just the finance discipline. As investors, learning from the wisdom of the greats and from other disciplines of knowledge can help us become better investors. In this context, the universal laws do offer us plenty to think about, introspect and get insights from. By incorporating these universal laws into our investment strategies, experienced investors can navigate the complexities of wealth management, hopefully as better investors.
