Archive for September, 2013

Saving Investors from themselves.

Saving investors from themselves
“Dear investor, the fault, is not in our stars – and not in our stocks – but in ourselves,” said Benjamin Graham, the father of value investing, and better known as Warren Buffett’s Guru.

In early 2000, a business newspaper carried a front-page picture of a big crowd in front of a bank. The picture carried the headline, “ Investors queuing up to apply for shares of an unknown software company.”  A year later, many software companies went defunct.

In 2003, I told an acquaintance to invest a small amount in mutual funds. I met him in 2007. He hadn’t yet done. Instead that year, 2007, he found courage to buy into two IPOs.

Ofcourse he didn’t seek my advice. Needless to say, now in 2013, those two stocks are bleeding. It is estimated that a third of Indian investors have bought only those two stocks and are now staring at a large loss!


How did this come to pass?

How come people who refuse to invest, suddenly find the courage to buy any garbage that their brothers-in-law ask them to buy? The fault, as usual lies, with us. We don’t follow basic rules. The comparisons we do, the questions we ask when we buy mobiles and tablets are never done while investing in stocks. Sad, but true.


Here are five thumb rules that we can use:

1.    Putting all of your eggs in different baskets

Whenever I travel my father always tells me to keep some cash and a debit card separately from the wallet. The idea is that in case the wallet is lost, I would not be stranded for cash. The idea is the same as not keeping all your eggs in one basket. Invest in house property, equity stocks, mutual funds, gold,…

At the height of the real estate boom of USA in 2008, a NRI told me that her servant maid owned 4 houses (all bought on zero down payment loans, of course) and finally had to sell all of them and still owes the bank money. Diversification is about sleeping well. Remember the best laid plans of mice and men can go awry.
2.    Falling for high returns  and low risk trap

Whenever you hear someone saying 24 per cent returns with no risk,” run as if a lion is chasing you down. Promise of high returns whatever may the business model, be, reeks of a Ponzi scheme. Any business that promises high returns especially within a short span is taboo.
3.    Not investing regularly

We  all understand in Fixed Deposits and invest heavily invest in these or in real estate. But most of us never look at investing regularly in equity markets via monthly investments called Systematic Investment Plan( SIP). Indian investors invest little in their own equity markets but today foreign investors hold a large stake in many of our banks and our manufacturing companies… The foreigners seem to have more faith in our country’s future than us!
4.    Check valuations not the price

While investing, valuation matters a lot.  For equity shares the most widely used valuation metric is reflected in the PE ratio. The higher the ratio, the costlier is the valuation. This does not necessarily mean cheaper stocks are good. I have seen many people go only by price and not valuation. So if ABC stock is trading at Rs 1000 they assume it is costly and XYZ is cheap because it is only Rs 10. What matters is price compared to profits. Thus if ABC price has a profit per share (EPS) of Rs 100, its PE is 1000/100 or 10. This is generally considered worth investigating further. On the other hand, if XYZ’s earning per share is Rs 0.5 its P/E will be 10/0.5 or 20. It is twice as expensive as ABC. So thinking Rs 1000 is costlier or Rs 10 is cheap is simply not right.
5.    Falling for the new-new thing

Dot com in 2000, infrastructure stocks or funds in 2007, gold in 2012 or may be real estate in 2013. Buying into anything that is extremely fancied by most is a recipe for at best very low returns or at worst disaster.

Happy investing!


Of Uncle’s and Aunt’s.


What uncles and aunts can teach you that the business newspapers will not.

If you are going to invest in stocks over the next five years, would you hope for a higher or lower stock prices during that period? Many investors get this one wrong, they are elated by higher prices and depressed when they fall. This reaction makes no sense – Warren Buffett.

There are 60,000 economists in the U.S., many of them employed full-time trying to forecast recessions and interest rates, and if they could do it successfully twice in a row, they’d all be millionaires by now…as far as I know, most of them are still gainfully employed, which ought to tell us something. – Peter Lynch
We can say the same thing about our business news people too. Thing is investing is all about ten,twenty years from now while writing headlines is all about today, not exactly co-related.

“Blood bath on Dalal street”, claims the newspapers headlines following the 700 point drop in Sensex on August 16th. Do google blood bath on dalal street and you shall see that every year ‘blood-bath’ occurs. Leading one to think that probably it is a scary place for people to set foot in!

Today, the investors interest in equity stocks and funds is so low that not many investors are around but if you see people who have made serious wealth over the long term, they are likely to have started small, kept investing, learn a thing or two about what fund or stocks to buy etc but more importantly never let the headline be their guide for investments.

And if you thought that is a tough thing to do meet Mrs Ashalatha Maheshwari from Mumbai, this 77 year old grandmother has seen a thing or two since she started investing in 70’s. Her investments are about 4 Crs, apart from this the house she lives in was bought from the profits she made by investing too. She reads annual reports diligently and is a fixture in most Annual General Meetings so much so that even Ratan Tata remembers her!

Not convinced ?

In my sleepy little home town we had an investor association that met every month, I came across a middle aged person who was the quintessential middle class guy, living in a small house, driving a moped, you would expect him to be working for some bank and you would be seriously wrong. he would  talk to us about how it is best to invest for long term in companies with great brands, captive business etc. Nothing esoteric just basic steps of long term investing. Many years later I learned that this ‘uncle’ who moved around in a TVS50 was worth a cool couple of crores and that was a decade back ! All made by diligently investing in great brands and good businesses with excellent managements like Colgate, HLL, ITC, CRISIL etc. He was in a way our own Warren Buffett.  HE was financially independent, yet unassuming and ready to teach anyone who cared to listen.

Both the ‘uncle’ and grandmother featured above would have gone through recessions, inflation, balance of payment crisis, etc. and kept investing.

OF course not all investors can be expected to study balance sheets and find which stocks to pick, it is much easier to invest in a Mutual Fund via monthly investments, but no, we don’t do that. We start investing keep at it for couple of years only to see the low rate of return and stop investing. Of course we will start investing again after market goes up !! Rinse & Repeat till glory comes. That will never work, what works is keep investing when there is blood bath all around, in fact invest more when you hear words like Blood-bath, Mayhem, crisis, etc.

If you go to you tube and search for the short film One Idiot, made by IDFC Foundation on habits that make an investor successful though, the message is clear. There is a path to financial independence and leading life in your own terms.


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