The biggest personal finance lesson from the fall of Rajat Gupta

Everything that goes up comes down as well. While that is true mostly in the stock market world, when applied to human beings, it is sometimes hard to digest the consequences.

The world must have been shocked to read about the conviction of Rajat Gupta, a former Goldman Sachs board member who leaked secrets to his business friend and hedge fund manager: Raj Rajaratnam, founder of the Galleon Group hedge fund.

Rajat had everything going for him, a life that many read and talked about after he set an example of rising from humble beginnings to so high in life and for all the philanthropic work that he has done.

This begs the question – what does this have to do with personal finance?

I want to be rich

When most of the investors are asked a question – what do you want to achieve in life financially, pat comes the reply, “I want to grow rich”.

Well everyone does. But if you fiddle for a moment a bit more and ask why do they want to grow rich, they will say that they want to have a car, buy a big house, live life lavishly among a host of other things.

 That implicitly is their financial milestones. In order to achieve those milestones, they want to become rich. But they don’t necessarily talk in those specific terms. That is not a fault of theirs – it is just that they have not been conditioned to think that way.

So what is the problem with the financial aspiration of “I want to be rich”?

I think the problem is that you are asking your tailor to stitch clothes for you without allowing him to take your measurements. What that loosely translates into is that the piece of expensive suit that you want to wear for your marriage anniversary will be doomed (the cloth guys!).

If you want to grow rich, how much money will make you rich? A few crores or 100 crore? The problem with wanting to be rich is that the definition keeps changing and when that happens, you are aiming for a moving target. Now how good is that?

Ever tried to catch a running hen? Apart from the fact that it’s fun, you keep chasing something zig zagging and moving and slipping from your hands. The same is true of planning to save your hard earned money for a goal which reads ‘wanting to become rich’. You don’t know how much you want!

Investors need to define what rich is for them

Once that is defined, the other important parameter is when does one want to become rich? Pondering on the number of years to this important goal will probably tumble some skeletons out of the cupboard. Investors will then begin to ask themselves questions like, “Oh, the marriage of my child happens in 2019, and I want around 7 lakhs in today’s cost then” or “I want to buy an apartment in 2025 worth 50 lakhs today”. Now you are talking!!

Once you begin to put two and two together on when the milestone needs to be achieved and at what cost, you will then begin to make it more feasible to save money each month or each year for that personal aspiration of yours. In the personal finance world, the experts call it Goal Based Investing.

And how does this relate to the Rajat Gupta case?

Well, the guy was rich but he did not know how much more rich he wanted to get. When you have needless possibilities before you, you tend to go astray. From what I read, Rajat wanted Raj Rajaratnam to fund a future fund of his and was making profits for the Galleon founder so that he would return the favor in the future.

The problem with such aspirations is that you don’t know when and where to stop.

I am devastated to read about a highly reputed Indian meeting this fate but if only Rajat had put a lid on the limitless riches he wanted to make, the future would have been brighter than the somber darkness of a jail cell.