Well for those who took up a job in 2007/8 (means born in 1985 or later) markets have not been a great – at best it has been lukewarm. All those who started a SIP in 2009 or later are still waiting to see some returns over the bank fixed deposit rates.

Those who listen to their ‘psu’ or ‘government’ oriented elders in the family even starting a SIP must have been difficult. Now they must be facing the wrath of the family saying ‘see your portfolio is down by 30% – in the bank you would have earned….’ blah blah blah.

So these kids are under tremendous pressure -on one side from parents who do not understand equity investments, media which loves action, and other classmates saying ‘see I told you not to listen to Subramoney (take your pick) see what has happened.

What should they do?

1. Remain calm: if you are investing for a long term (let us say for a goal 5 years away) just continue your SIP.

2. Remember if you look at equity on a daily basis, you could get scared – just stay away from the idiot box or the pink paper whichever is your mode of poison.

3. When somebody asks you to buy a Pension Plan, ask for the asset management charges. Recently one mutual fund has launched a Retirement Plan – and I have seen websites and ‘advisors’ doing a detailed analysis WITHOUT talking about the asset management charges. Did I say ‘It is difficult to make a person understand something if his livelihood depended on ‘not understanding it’ ? well here that is another problem…

signing off for now…:-)

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Let me first define best advice:

• if you hear it in 2000, 2010 or 2020 it should sound correct
• the regulator should not find it offensive
• it should not talk about any one particular company or sector
• if it is N S E you should talk Nifty…and if it is BSE …Sensex
• it should not offend anybody
• it should not be scandalous

is it easy? Well initially I thought of this as difficult…but here are a few tips on what to say :

• Equity investments are for the long term
• Stay invested for long term – when the market turns upward, you will benefit
• Keep investing in the short run and long run, you will benefit
• Buy only good shares
• Do your fundamental research and analysis before you invest
• Do not invest in a small company unless you are sure about the promoters
• If you had invested Rs. 1000  in 1980 in Wipro today it would be worth more than Rs. 30 crores
• Read the prospectus before you invest
• ……………and many more…………..

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The average return on equity investments (without reinvestment of dividends) is about 18% over the past 31 years. Does it mean that every year you got 19%? The answer is no. Such ‘zero standard deviation return’ is possible only in CERTAIN debt instruments. In equity investments there have been years of +242% as well as -46%.

When you see years in which the stock market returns are say 90% – you know that immediately following that or in a couple of years you HAVE TO GET A NEGATIVE return, because the 90% return HAS TO REVERT TO 19% – REVERSION to the mean.

However there is no pattern of 38%, 0%, 19%….it can even be -242%, 29%, 45%, -32%…and slowly catch up with 19%. The theory says a given return (value) will continue to return to an average (return) value over time. It may happen that over a period of time the average itself will increase or decrease, but the impact will be far more gradual.   This statistical measure can be applied to any measurable value, including interest rates, cricket scores of a team, batting and bowling averages as well as the return on a certain investment.

This theory is extended to a bunch of good fund managers too. Suppose you own A,….E five funds. There is a good chance that suddenly one fund may not be doing well. Do a lot of detailed research and then pump some extra money into it.

Of course you need to remember the old maxim ‘Winners rotate, losers remain at the bottom’ – so be careful!

Very funny how people use average returns when it comes to investing. They have no clue what will be the future returns. Neither does the fund manager, the agent, the RBI governor or the Prime Minister. So they end up seeing the past returns. This is like ‘I cannot see in front, so I will look in the rear view mirror and drive’. This works fine if you are driving in a desert or even a long road. You only hope you are not in choppy markets. Unfortunately, markets are choppy ALWAYS!!

In case of say gold the last 3 years average return is 32%p.a. – and so channels are urging a buy. The average return over a 30 year period is say 7%p.a. in rupee terms.

when you watch television channels urging you to buy gold remember the returns figure and the ‘mean reversion’ story..that is all..

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Leaving emotions out of your financial decisions is tough. Behavioural Finance is a science that gauges among other things, the rationale of investment decisions. UTVi talks to PV Subramanyam (Subra), financial trainer on the subject and discuss how being unemotional is crucial in matters of finance, especially in these volatile times.

When there was a flutter about ICICI bank, people started breaking their fixed deposits… taking their money out from their accounts… Earlier with the Tsunami, real estate lost favour… People started withdrawing from it. We tend to take investment decisions in panic…

Subra: If a person is serious about his equity investments, he will be emotional about it. It is difficult to say buy a share and not be emotional about it. If you have all your money lying in ICICI bank and you feel there is a problem with the bank you WILL panic.

Do you see people facing losses because of hasty decisions?

Subra: Actually, people do face losses because they react to such kind of news. Either they react a little too early or a little too late.

Markets have come down from 21,000 levels to 8,000. Analysts are saying that it is the right time to buy. But investors are into panic selling…

Subra: That is typically how people react. First, when the market came from 21,000 to 18,000, there was denial… you say this is temporary… At this point, you need to say I will invest in a disciplined manner than react to market prices.

There has been a study on the behaviour of people’s investments as far as their financial investments are concerned…. it’s called Behavioural Finance. This is applied from psychology to see how people react to financial situations. There are certain things like mental accounting. Your mind tends to make you feel good. So when things go wrong your mind tells you that this was your broker’s mistake… the market’s mistake… So you keep fooling yourself that you are very smart, and that you will never go wrong.

Vikram Oza: Don’t people react to panic situations when they don’t know what the future holds, because of that uncertainty, they say, better be safe than be sorry?

Subra: There are two situations. One is to be safe than sorry, the other is to consider what would others think… In a panic situation you should look like you have tried. And you fool yourself by saying ‘I have got rid of all my shares at 9500’. When market goes to 9000, you suffer from confirmatory bias… You say, I knew that the market will go down and the market HAS gone down from 9,500 to 9,000, you think you are very smart. What you have missed is the journey from 21,000 to 9,000. And when the market goes from 9,000 to 11,000, you have already lost the so-called ‘gains’. At 11,000, you say the markets will come down to 9,000 and then I will buy… the rise may  be sudden and stunning!

Keeping all that in mind, if I want to remove emotions out of all my investment decisions, what do I need to do?

Subra: Just go out and invest in some notebooks. Write down in your notebook what you are buying and why you are buying. Write down the emotions part of it. Maintain a personal investment diary and write down all your investments in an excel sheet. See, how much you are earning. Six months later your 200 page notebook will show you what you have done. If you have done very well, good… continue doing it. But, if you are underperforming the index, underperforming the fund managers, don’t invest directly in equities, put your money in mutual funds, in SIPs or in some kind of automated trading. Look at your asset allocation, like how much of your money should be in equity and how much in debt. A Systematic Investment Plan (SIP) completely removes emotion.

Do you approve of automated systems? …Using machines to make your equity investments, would it help?

Subra: Your emotions are completely removed when you use automated systems. In these volatile times, especially, if you are a buying guy, you have to continuously keep buying and selling. In this case, you are much better off giving this to software which is well written. But remember behind the software, there’s a human who has written it logically as to what you should do when the markets are down and all this is thought of and written unemotionally. Even automated systems cannot protect your capital entirely.

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