Stock markets are at high, keeps breaching previous highs every now and then. Economy should be doing well and life should become easy right. I was surprised to see that instead of life becoming good, experiences all around are either stagnant or deteriorating.

Some of the recent experiences I have reflect the new trend. I went to a speciality restaurant for a good dining experience. This was an upscale restaurant chain which gave fantastic dining experiences before for our family. When we went in, we noticed that the restaurant has split into two distinct cuisines (Chinese and Bengali) within the same space with just some seating demarcation. The special food is going to be cooked in the kitchen by the same set of cooks. The ambience had a worn down look with paints peeling and seats torn. When we received the menu, we immediately noticed that the prices have increased by 25-30% and the portion sizes have come down 25-30%. The waiter had no idea on what the menu is about, had no suggestions on how to go about a multi-course meal. In the end, the experience on dining big was just on the bill amount, nothing else. It would have been a better experience having the food from a cheap takeaway and eating it while watching TV at home.

Similar heart burning experiences everywhere. Cabs are not assigned to you during peak hours unless you pay a hefty premium for the same cab. Mobile apps are misusing the notifications feature to deliver ads. OTT subscriptions downgrading you in the middle of the subscription plan to serve more ads. Grocery delivery is sending bad quality produce for regular delivery and introducing a premium feature for fresh produce. The list goes on.

The push from success to excess is evident even in non consumer space. I noticed a recent trend, many executives are asking for a template/runbook based execution so that they can do a lot with very little or no training to the people doing that job. In short they want jobs to be in black & white and easily doable by gig workers who can be onboarded and off-boarded at will just like food delivery. This kind of thinking harms in many ways, one – it starts to increase the need of people who are good at parroting not an original thinker, the other is infusion of a blandness and mediocrity in everything; check for thermometer in amazon for proof. It is not just limited to every day items, even cars start to look the same across brands.

Executives think that they are special and can bring in insane profits by making people do exactly what they say, which may be true in the short run. History says that the best advancements came from grounds up not from top down. The cognitive load that it causes on the executives who do not want their workforce to think because it hampers their execution is huge, it will cause a flameout, momentarily burning bright before failing. Resilience and collective wisdom is poorly understood because it has a very long learning horizon. Being resilient will even come across as inefficient in the short run, but will prevent uncle points.

The more from less mindset that happens through grabby nature instead of advancements and innovations is hard to curtail now, it may be a cycle in the economy. We may have to weather it out before it improves again.

Based on our ability to foot the bills for standard of living we are often placed in socio-economic classes. The middle class is one long continuum before reaching affluent or HNI class. What I observed is, unforeseen events can push an individual and their families a notch or two below their current status more often than well planned savings and investments pushing individuals few notches above. Thereby it is easy to lose wealth than to gain and keep it safe, so extra care needs to be taken to preserve it. Someone who has an enviable lifestyle of a luxury apartment and a D segment car can lose it all within a month due to either a natural disaster or an accident which was never thought of.

These type of risks are tail risks, we are inherently optimistic and given the low probability of these high impact events we always think that such cases never happen. So we never have a mitigation plan in place. These risks when materialising will not just cause a setback, it ruins. Tail risks cumulatively increases, which means though as a single risk in single exposure looks negligible, multi risk, multi exposure over time will increase the likelihood of ruin very much.

Consider the following risks taken together – You don’t wear a helmet while riding a motorcycle, you frequently ride in the night in accident prone highways, you don’t sleep well often, you don’t eat a balanced diet, your motorcycle is not maintained routinely. The combined risk of having a serious injury has a very high likelihood thereby leading to a ruin.

Some tail risks like lifestyle diseases can be avoided altogether with a healthy lifestyle, many others like a geopolitical instability can’t be mitigated but can only be prepared to sail through with diversification of holdings. Insurance is a good option against many unforeseen circumstances, though many people view insurance as a expense, it is a way of paying it forward and praying such a scenario never happens. Someone not paying for insurance will have some money left in hand but at the grave risk of losing it all.

Identifying the tail risks in our life and planning for a mitigation is very much necessary. Being poor is expensive, once we are knocked off the socio-economic position, it is very difficult to claw back on to the same position. Mitigations are not just insurance, it is healthy lifestyle, adherence to safety standards, avoiding risky behaviours, hedging, diversification etc.

I like Nasim Taleb’s work on this topic and much more on probabilities. We don’t realise the skin in the game in the long term as we are too short sighted as a common human.

Early 2000s in India had a lot of Public Sector Undertakings (PSU) float a voluntary retirement scheme popularly known as VRS. If you choose to live in a Chennai suburb in your late 40s or early 50s with no loans and a house to your name, then the monthly recurring expense of 5,000 rupees with some set aside for additional expenses like repairs, medical etc annually amount to about a 1,00,000 rupees. The VRS plans gave a mouth watering deal of 15-20 years of annual expense. A lot of people who opted for this were in the middle management who were bored of waking up to go to office everyday. Most of them had a thought of becoming freelancers or do simple jobs to keep up the cash flow and not disturb the nest egg.

The reality was harsh, I have first hand information from near & dear ones and neighbours. The problems I observed were that

1. Skill was not up to date in their field as a lot of them were middle management.
2. Lacked the marketing and networking skills needed for a freelancer, unable to advertise and convince businesses to give them work.
3. Did not understand uneven cash flow, inflation, investment diversification etc as they always had ever increasing salaries paid monthly, their entire corpus was bank deposits.
4. Continued with their pre-retirement high income lifestyle.
5. Did not cover themselves with medical insurance, one critical illness away from bankruptcy.

A majority of them ran out of their retirement benefits within 6-7 years when they were hit by inflation – medical, food and education went faster than retail inflation where the interest rates were lagging behind. From being their own boss they had to take their kid’s help to live peacefully in just a short span of a few years. They were not able to find jobs as a free lancer; even if they did, they didn’t manage to break even. They also felt too shy to cut down their status symbol items in front of their near and dear ones.

Unless we have a passive source of income like a rental income or income from an established business/equity that can grow with inflation and cover monthly/annual expenses comfortably, it is very hard to achieve financial independence through a retirement corpus alone. A lot of FI/RE (Financially independent, retire early) blogs explain that we need to have a minimum of 300 times our monthly expense or 25 years of annual expenses in the corpus to achieve that. These have been inspired from low inflation economies not for India, I had observed that what looks good for 20 years in India usually runs out within 6-7 years.

Financial independence for a regular salaried citizen is extremely hard, especially for the people I observe who are on the consumption based economy, are encouraged to take loans for their purchases. What we need to plan for is financial resilience. More about it in subsequent posts.