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Saving investors from themselves

Saving investors from themselves:

First written in Industrial Economist in August 2013 when gold just had started its fall and real estate was still holding on.

Link to the original article here :Industrial Economist

The fault, dear investor, is not in our stars — and not in our stocks — but in ourselves…” Benjamin Graham

(Endearingly called father of value investing and more famously known as Warren Buffett’s Guru)

The year was early 2000, opened the business newspaper to see a front page picture of a large crowd standing in queue outside a bank, with the headline “ Investors queuing up to apply for shares of an unknown software company”. Cut forward to 2001, many software companies went bust.

Year was 2003, had told an acquaintance to invest at least some amount in mutual funds, but he never did. Suddenly in 2007 he found courage to buy into two IPOs ( Initial public offering for the youth & public issue for rest of us!  ) of a large industrial group. In 2013 those 2 stocks were still in losses. It is estimated that 1/3 of Indian investors have bought those 2 stocks only and are staring at a large loss.

How did this come to pass? People who refuse to invest, suddenly find courage to buy anything and everything that their brother in law tells them?. The fault as usual lies with us, we don’t follow basic rules ( the comparison we do, questions we ask, for mobile phones and tablets are never done before investing hard earned money).

Here are few basic thumb rules that we can use to not only save us from ourselves but put our money to good use

 

  1. Putting all of your eggs in one basket: Whenever I travel my father always advises to keep some cash and a debit card separately from the wallet so that in case the wallet is lost I still have some money & a debit card. The idea is same as not keeping all eggs in one basket. For some of us our house is the biggest investment but apart from the house one lives in the other investments needs to be well diversified ie some portion in bonds/ deposits, some in equity mutual funds/stocks, some in gold etc. At the height of the real estate boom of USA in 2008, an 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 owe the bank money. Diversification is about sleeping well. The best of our plans may turn sour, hence diversify.

 

  1. Falling for high returns and low risk trap: whenever you hear someone saying ‘ 24% returns with no risk’ run as if a dinosaur is chasing you. Promise of high returns whatever may the business model be reeks of a Ponzi scheme (where capital given by one person is used to give  returns to another works till it goes bust)  any  investment that promises high returns especially within a short span is suspect.

 

 

  1. Not investing regularly : While we all understand Fixed Deposits and invest heavily there or in Real estate most 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, manufacturing companies etc. The foreigners seem to have more faith in our future than us.

 

  1. Falling for the new-new thing, be it dot-com/software rage of 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 disastrous.

Happy investing!

{ 2 } Comments

  1. Bhaskar jain | July 26, 2015 at 12:26 pm | Permalink

    Reversion to the mean is also a very important truth in life. It may take lot of years but essentially everything is mean reverting. Problem is we look at the recent past and extrapolate it to the future. Lot of high flyers like recently Kitex Garment which was growing well.. one bad quarter and stock went down 20%. All those promoting this stock are not affected since they were holding from very low levels but recent retail guys who went all in must have lost heavily.

    Diversifying across un-correlated assets is the key. I may have 30 stocks but if all of them are from / depend on the sugar sector then I am not diversified.

  2. shankar | July 27, 2015 at 5:21 pm | Permalink

    Hi Bhaskar,

    Thanks for the inputs and please continue to comment,

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