August 2, 2019

Is your client an Abhimanyu in a Chakravyuh?

Amit Trivedi

Owner, Karmayog Knowledge Academy

Is your client an Abhimanyu in a Chakravyuh?

During the Great War of Mahabharata, one day the Kauravas separated Arjuna and Krishna from the Pandava army, and then set up a multi-tier defensive formation, called chakravyuh. In the Pandava army, only Arjuna and Krishna had the knowledge of breaking this formation. There was nobody else who knew how to do this. A teen-aged Abhimanyu came forward. He had heard his maternal uncle Krishna explaining the chakravyuh to his mother Subhadra when he was still in her womb. However, by the time Krishna came to the discussion of the seventh and the last chakra, Subhadra, who was exhausted by then, fell asleep. Abhimanyu did not know how to get out of the last chakra. The brave child, still went in, but could not survive the combined strength of the Kauravas and the complexities of the seventh chakra and died a hero’s death. Incidentally, the Pandavas went to protect Abhimanyu, but since they did not know the intricacies of the formation, they could not move ahead, and were blocked by Jaydratha.

There is a very powerful lesson in this story for investors. Abhimanyu got into something that he did not know how to get out of and paid a very heavy price. Very often, investors enter into an investment without really knowing how to get out of the same. The ability to liquidate the investment with ease is one thing that any investor should look for in any investment that carries any amount of risk. In the words of Warren Buffett: “Invest within your circle of competence.”

While this is an important lesson for the investors, there are powerful messages for the advisors, too.

First of all, Abhimanyu had no choice, as the challenge was already accepted. On the other hand, most investors have a choice to avoid any chakravyuh, if they do not understand it.

Second, even though the Pandavas did not know how to break the vyuh, they still went ahead with Abhimanyu – once again they had already accepted the challenge so sending Abhimanyu was the only choice, and someone had to go in with the kid to protect him. An advisor can actually advise the investor against getting into something that neither the investor nor the advisor understands. In the above story, the advisor would be akin to the Pandavas, whereas the client would be Abhimanyu. What would happen if the investor jumps into the chakravyuh, even when one does not know how to get out of it? And imagine what happens if the advisor also gives the investor confidence to get in, instead of stopping him.

Third, understand that getting out of chakravyuh was more important than getting in. Ditto with investment avenues. Getting in is often easy. It is getting out that the investor gets killed. Many investors learned the lesson the hard way during the recent crash in mid-cap and small-cap stocks. But then, this was not the first time that such a thing happened. And this was not restricted only to the retail investors – many institutions and wealthy investors also could not come out of the investments. While they entered these stocks, there was ample liquidity, but at the time of exit, it just disappeared. A similar thing happened during the credit crisis in the debt markets. Reasonably liquid bonds became illiquid the moment the credit rating was downgraded, or when the creditworthiness was perceived to be lower.

The story of Abhimanyu is told as that of a very young, brave, but unfortunate warrior. However, it is also a story of dire consequences of doing something without adequate knowledge.

As an advisor, it is important to understand various products you recommend, and let the investor know the consequences of doing something one is not capable of doing.