Don’t be the frog in boiling water

We can relate one management lesson taught based on the boiling frog story  with the investors behaviours to inflation and market volatility.

The story goes like this …

If you put a frog into a pot of boiling water, it will leap out right away to escape the danger.

But, if you put a frog in a kettle that is filled with water that is cool and pleasant, and then you gradually heat the kettle until it starts boiling, the frog will not become aware of the threat until it is too late. Finally , the frog dies.

The story is often used as a metaphor for the inability of people to react to significant changes that occur gradually.

Investors respond to volatility of the markets the way frog responds to boiled water in first case. The basic characteristic of the market is volatility. Normal markets are volatile in nature. However ,Investors react to market volatility and act spontaneously. This way, frog behaviour to boiling water can relate to investor behaviour to market volatility.

Inflation is slow but dangerous poison. Frog does not realise the pace of boiling water and started enjoying it like a warm water bath. Similarly, investors ignore the inflation in initial years .Inflation may not pinch in short time. However, it has severe impact over a long term.  Rs 100,000/- today will be worth only Rs 92,000/- next year due to 8% inflation. Similarly, the future value of Rs 30,000/- becomes 3,00,000/- over a period of 30 years considering inflation of 8%  .i.e. 10 times in 30 years.

We generally – most of us – understand the possible consequences, but the longer we go without having to deal with those, the less likely we think they will come about. Unfortunately, like the outcome for Mr. Frog, the water will boil and those who haven’t extricated themselves in time will suffer the same fate.