The Hindu Business Line : Self-control pays

A successful rule-based money manager whom we met recently suffers from acute diabetes. He attributes his success in money management to the self-control that he developed in his food habits due to his health condition! He told us he constructs his portfolio with high dividend-yield stocks. How is this strategy related to self-control?

You may have heard of Oscal Wilde’s quote, “I can resist anything but temptation”. It is true. If we tell you not to eat chocolates because you are gathering weight around your waist, you may be tempted to have more.

Overcoming temptation

Our mind is geared to craving more of that we are prevented from having. The money manager learnt about this from his health condition. He overcame the temptation and stuck to a healthy diet. And he transported that self-discipline to the asset markets. How?

You and I like to see our investment account generate some cash at regular intervals. If the account does not, we may be tempted to sell some shares to realise cash. The problem is that we often use the cash from the shares sold for current consumption.

But what if our investments gave us some income at regular intervals? Perhaps, that may give us some self-control — prevent us from selling shares for current consumption. It is not that this income has to be sizable. It is just that we need some cash flow to mollify our desire for investment income.

Money management rule

Now, you will be able to appreciate the money manager’s strategy. The dividend income allowed him to distribute some cash to his clients at regular intervals. This allowed him to manage the portfolio without his clients pestering him to sell shares to generate cash for current consumption.

Experts in behavioural finance have observed this behaviour among investors. They call it “consume dividends and leave the capital intact” effect.

It is, perhaps, the reason why companies continue to pay dividends though the tax rate is higher than that on capital gains. To think a successful money management rule can start with an acute diabetes condition!

(The author is a Chennai-based financial analyst.)

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