There are a few Investment myths which are so prevalent that I do not make too much of an attempt to break it in private conversations! When I am in a crowd or a group people do step up and ask ‘what do you think the market will do’. I actually do not have to answer that question at all. Somebody else will answer that question talking about US, Japan, Gold, Oil, Raghuram Rajan, SIP inflows being sticky,…..etc. and the dinner would be served 🙂 . Let us talk about some of the investing myths:

  1. You Get what you pay for: Wrong. India has 40+ mutual funds, a zillion portfolio managers, 18 life insurance companies, etc. almost all of them charge the same amount of money for managing your money. Not all of them are good. Some are bad. Many are corrupt (you could easily ask them to buy a lemon), many are incompetent, and some are purely lucky. Some have a track record that looks good just because they started early. So you do not know whether you are paying for a brand, luck, talent, or you are just being lazy investing in a big fund. You surely do not get the value that you expect from a fund manager if the fund is poorly managed. Or managed by corrupt managers.
  2. Fund managers, Advisers, and Investors: the interest is not really aligned. The Fund manager is actually worried ONLY about the size of the Assets Under Management. His fee depends on that and he will sponsor articles like “SiP should be done for the next 3000 years”, ‘Power of compounding for the past 555 years’ – and I find that many people cannot digest this. The adviser wants / needs action. He has to remove your money from Hdfc Equity fund and put it in Icici Prudential Discovery fund or Franklin India Bluechip fund. This may be good or bad – does not matter, I am just saying that an adviser benefits from activity. You, the investor benefits from good performance of a fund WHEN YOU ARE ALREADY in the fund. See the missing alignment? So it is in your interest to stick to good funds, read about ‘Regression to the Mean’ and be willing to experiment with at least a small amount of money.
  3. Buy and Hold is the ONLY approach: “Buy Right, Sit Tight” says the Motilal Oswal ad. True. The problem is in the ‘buying right’. Many of us cannot accept that Asian Paints, Hdfc Bank, etc. can be good buys. So we go around looking for the ‘next asian paints’ and ‘next Hdfc Bank’ – so we buy some small company and ‘sit tight’ hoping that this caterpillar will morph into a butterfly. Many of them do not. ‘Buy and Hold’ works for a person with awesome stock picking skills, ability to read the results (see LnT slipping?), get rid of companies with poor management (Bombay Dyeing?), pick small companies and monitor them regularly (Biocon in the year 2000), realign and reallocate portfolios. Just buying without any science and holding on till the cows come home is not a good strategy. Active Inaction is necessary. You should know on a year on year basis why Colgate is there in your portfolio from 1977 to 2027.
  4. You Need to Invest with a Household Name: it is difficult to get investor to invest in smaller fund houses, or in companies with not a great visibility in the main stream media. Imagine telling somebody “I am removing your money from the biggest mutual fund and investing it in a fund house ranked 30th”. If I were not in this industry I would have considered this as a sure fraud. The myth of a ‘household name’ while investing is almost stupid, but most of us do it, simply because all of us think that the basic hygiene is in place. However remember one of the ‘household names’ was found with a fund manager’s hand inside the cookie jar? They were let off with a rap on the wrist. Fund management requires skill and integrity. Locating good fund managers, and creating a good atmosphere for them is the job of a good fund house. Let us see what Nilesh Shah does in his new avataar as the CEO of a fund house.
  5.  You will get rich by investing: Investing to get rich is a multi decade, multi generational compounding effect. So if your great grand father was a farmer (and your family sold the farmlands when the laws were changed..you are no long a farmer), your grand father worked well but lived hand to mouth, and your father was an honest senior bureaucrat, your family would not have had too much money to invest. Assuming you are the first generation investor, chances are that you started investing at the age of 34 instead of 1 year of age that a business family would have started him. Many advisers (and hence investors) believe that it is their BIRTH RIGHT to get about 20% p.a. return over the next 30 years and they will get really rich. Perish the thought. The way to get wealthy is concentrating on your DAY JOB. The investments should grow above the rate of inflation..and create a nice corpus for you to last from retirement age (55 years) till your death or spouse’s death (age 94). Be happy with a 2% REAL CAGR. That spread over 40 years is a serious amount of money, but not RICH!!!

 

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