Okay, so the market fell 1,100 points on 22 May 2006, it fell 350 points on 31 May 2006 and another 327 points on 1 June 2006. What is to be done?

Just go back in time. Rewind to Diwali 2005. All the bulls including die-hard bulls said the market would have done great if it ended Diwali of 2006 at the same index as Diwali 2005. No expert was willing to brave even a 9000 call.

What actually happened? Just go back to your older files, and refresh. The market made these bulls look ordinary. January, February, March…. the markets cross 11,000 then April sees 12,000. Then, we celebrated.

We made 12,000 stickers and stuck it all over the place. We made T-shirts, mugs and celebrated 12,000.

Then the market had a hiccup. We panic. We sell. We cry. We moan. We expect the Finance Minister, SEBI Chairman and all of them to crowd near the wall to save humpty dumpty.

In reality, nothing is lost. Just rewind to Diwali in your time calendar, you would be thrilled with the 10,000 index. Rewind to February when we were still celebrating 10,000. Just because we ran too fast in January, then galloped in March, April and May we are now worried. Just slow down and you will be fine.

The key takeaway, ‘The market will do what the market will do. You have to do what you have to do’.

Markets will be volatile. You will see a sensex of 10,000 and even perhaps 20,000 in a 12-month period. As a rule everybody loves a bull market. So the FM, the SEBI Chairman and everyone else will look worried and will try to talk up the market.

Keep in mind – for 3 years we have believed that markets cannot come down, and interest rates cannot go up. That might be about to change. We believed that a 2-day fall would be followed by a rise. We believed that the market is fairly valued at 3000, 5000, 8000, 10000 and 12000. We may rethink. We believed that you could go to the terminal in the morning and come back richer at the end of the day with Rs 5,000 or Rs 50,000 simply by buying. The bigger you bet, the greater was the gain. We may rethink on that. We believed that we could build our own portfolio and save the asset management charges that mutual funds charged. We may rethink on that.

The lessons are very simple.

1. Asset prices fluctuate and they are inversely related to the interest rates. Markets are but an asset class. If it goes up, it will come down.
2. Individual investors will come, conquer, panic and leave. FIIs will do similar things. You need to act sane. Nothing changes in the economic situation. The solution lies in having an investor mindset rather than a trader mindset.
3. If you have money for the long run (I mean 3 years at least) you should be in the market. If you need to pay your EMI by selling shares, you should be praying in a temple.

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Financial planner: supposed to know everything about you PERSONALLY so actually called ‘personal financial planner’ who helps you with YOUR GOALS and the steps to achieve them. He tells you your asset allocation – say 70% equity and 30% Debt.

Portfolio Manager: He chooses in which shares and which mutual funds should your money be invested.

Broker: Executes transactions on the basis of the Portfolio Manager’s advise.

Demat provider: Keeps safe custody of shares, bonds, and now even mutual funds

Insurance BROKER: buys you the TERM life policy based on financial stability of the provider and the least cost basis.

Clerk: Enters all this in www.valueresearchonline.com, myiris.com or www.moneycontrol.com to keep track of all these transactions

CA: Files your tax return on the basis of the details provided by the clerk.

To add to all this you can have another financial planner who will whet the process and tell you things are fine (just joking? think again!)

Banker: Claims he can do all of the above.

Investor: Gets a 24% gross return..pays fees to all the above and then is left with a 7.9% return. May have actually been happier in a PPF

http://www.bookzone.in/newtopsellers10.asp?qs=30 feels good to be the bestseller of the month at a leading book store in Mumbai

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And many others have made money because about say 30 years back (or say 50 years back) it was not very fashionable to “trade” equity. So when an electrode supplier liked the way L&T, Tata steel, Tata Motors or Hindalco were run, he was impressed, he bought the share and today is sitting on a few million rupees.

However some so called smart people have not chosen the shares to keep! They have got rid of Colgate, Hero Honda, Hindustan Unilever, State Bank of India, and invested in ‘B’ or even ‘E’ grade companies! The lure of the multi bagger is really huge. For me, the probability of an event happening is far more important – expected PV of the action is more important.

It is not uncommon for intelligent, competent people who have been successful in business or an academic environment to try their hands at trading on the markets. If I have been better than my peers in academics, I should be better than them in investing is it not?

In essence, because they have managed to outpace the competition in the business or university sector, they think they can do the same with investments. However, while this logic may be appealing, it does not always pay off and many of these individuals lose money for a variety of reasons.

If in a small incident like being “first” in a lunch queue happens by luck, or rather you are willing that it happened by luck, why will people not admit that they got a good share by luck? I do not know maybe a doctor can answer this question!

Speaking of doctors, they make excellent investors – ask the bank RMs who deal with them .

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Excited, he opened an E-broking account with a ‘reputed’ firm. He started getting calls and reminders from a Relationship Managers. Here is one of the Sms that he has received a few days ago:

“The market has next major resistance in the range of 5080 and 5090 (17100 amd 17170 – sensex). As the market enters congestion zone it will have to cross one more hurdle which is at 5130 / 17270 levels. On the dismissal of the same, the market will confirm its on going strength and in that case the level of 5330 / 5335 …however they are diverging negatively but will take time to convert in to a medium term weakness. Around 5350/18000 levels we will monitor the US markets closely..Even 17900/18000 is achievable with a hurdle at 5185/ 17493. the supporting factor will remain in the US markets that are still not in a down trend…On the downside we will concentrate on levels of 5010/ 16880 and 4960 / 16710 as major support as for the day and for that week. Failure to hold these levels will invite major weakness in the short term that may even push the index towards 4870 / 16420 levels without any interruption…”

He is a rich gujju…and he wanted me to translate this. I confessed complete ignorance of what this means….can anybody help?

In the year 2000 somebody asked me how many years experience I had in ‘equity’ markets. I thought over and said 7 years. My explanation was what I had learnt from the year 1979 to 1993 was skills like seeing how a client behaves, whether he will pay in a down turn, what is a good share – original or forged, etc. All this was no longer necessary for the organisations for whom I trained – they anyway took money in advance, brokerage rates were largely fixed as per slabs, risk management was through a ‘system’, grievance was handled by saying…’u know we are a corporate…’. I was completely out of the markets from the year 2000 – operationally and professionally. However I do trade / invest in equity markets – however now I think I do not know the equity markets at all.

It has changed – and for the better according to intellectuals. The number of people I see losing money, it is easy to make money buying shares of Hdfc bank, Kotak Bank, Indiainfoline, Icici bank – they all have e-broking subsidiaries. However a pure brokerage play is Indiainfoline – and the best proxy.

Note: Personally I/ portfolios I manage own some of the stocks that I write about.

And to think 80% of the Exchanges turnover is in nifty…God bless the clients….

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I have 2 friends – aged about 57 years. They were classmates and are now very close to retirement. Their investing philosophies are so different that I could not believe that the accumulated amounts could be so far away from each other. One of them did his MBA and joined ITC – and stayed there for 10 years before he went off on his own.He never married and so had no ‘house’ kind of expenses. Almost all his money (at least theoretically) could be saved.

The other person did not study beyond his graduation and held many jobs – currently he heads the sales function of a small company.

The person who did his MBA entered the equity market – and called himself an investor. However, he was just a incorrigible trader and traded every day. He was lucky to be a shareholder in ITC for a very long period of time and his portfolio other than ITC is a mess. He loses money every year in the markets and has no corpus to write home about. He would lapse into debt ocassionally (a.k.a trading losses) and then settle it from his professional income.

The other friend realised that he was no hare. He chose the traditional Indian way of saving (instead of investing) – ppf, lic, nsc, were his mainstay. Luckily I met him in the early 1990s and introduced him to some small equity portfolio. However he also was bitten by the equity bug and would put small amounts of money into some Fera dilution issue, picked up an odd L&T, Reliance, etc. – but the amounts invested could not have exceeded Rs. 500,000 over a period of 10-15 years. I introduced him to ELSS – and he has been at it for the past I guess about 10 years and with a vengance! He now has a portfolio of about Rs. 68 lakhs in equities.

I know another guy who was largely in debt for most of his life (say till 35, now he is 42) – but now seeks equity related ‘information’ from wherever he can get. In a train journey from Mulund to Mumbai VT if he overhears a share being discussed, he visits every site trying to do some research about it. However the buy or sell decision is mostly made on the group of people who travel with him. The research is some kind of ratification. As he is my neighbor’s friend ocassionally he calls me over telephone for a portfolio review. Of course his portfolio includes a lot of “i have no clue why I bought list” of shares – in fact it is dominated by such shares. Spoke to him last Sunday – he has shares in 44 companies totalling an investment of Rs. 13 lakhs – it is worth only Rs. 19 lakhs – over a period of 6-7 years. Do not know the IRR, but surely under performing ppf if I am not wrong. Quite a numbing experience.

Today the tortoise has a much larger portfolio. The hare and the tortoise story plays itself over in many ways, we close our eyes and refuse to learn. I do not know why.

Lessons:

Equity is a good asset class – but it needs far, far, far greater discipline and knowledge to build a portfolio than what a common man has. If in doubt Index or choose a decent fund manager. The gap between a debt product (with no fund management charges like Ppf) and an index fund (with low charges) is about 2-3% p.a. over a long period of time. However if you pick stocks keep measuring what you are doing. At some stage you need to accept that you cannot screw your own portfolio beyond a poing – of course there is no law against hurting yourself.

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“The world of equities seems to have opted for a bargain-basement sale. The BSE Sensex which scaled the dizzy heights of 21,000 points in January 2008 is today testing 10,000 and nobody is sure if the bottom has been found.

“Nowhere in the world are we close to a bottom. Put your money in a safe bank at 9 pct and forget about the stock market for the next two years,” Shankar Sharma, Joint Managing Director of First Global, told Reuters.
If that’s the case, one wonders if the response pattern will change to the Reuters Money question – Will the BSE Sensex dip below 10,000?

Well at that stage Madhu decided to quote me too. As usual I said “I do not know”. Being the great journo that he is he said “As my good friend and former NSE member PV Subramanyam says “these so called experts on TV are only looking at a teleprompter and not a crystal ball.” Subbu’s advice: “Stay the course, there’s no point in cutting losses now and neither will you gain anything by panicking.”

Luckily for me, I keep saying largely motherhood statements like ‘start early’, ‘spend less than you earn’, ‘pay yourself before you pay for your kids’ ‘Equity investing is boring, if you are having fun, check your returns in excel”. …..these do not become stale, so ….I am fine I guess!! ‘Market timing is risky’ ….

Thank you Madhu. Thank you Reuters.

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Similarly if you want to be a good investor watching television or the pink papers or the personal finance magazines and websites may be not the best way to prepare!

What do you really need to do to lead a simple, healthy life? Eat simple food (which your body knows), keep regular habits, get some exercise, get adequate sleep – these simple things should help you in your quest for a good healthy life.

It is exactly same for your investments – keep it simple (do not invest in asset classes you do not understand), invest regularly in mutual funds (for your short term requirement i.e. less than 6-7 years) or unit linked plans (longer term requirements), keep some money in banks for an emergency, spend less than what you earn. Learning about equity, commodities, ‘real’ estate and debt markets is a must if you are serious about investing. Learning happens from books – classic well written books which have stood the test of time. It is very difficult to learn from magazines, television, etc. and there are valid reasons for the same.

The limitations that media has in ‘educating’ an amateur is multi-fold. Let us look at some of them:

Journalists are trained to be journalists, not financial analysts. To create wealth over long periods of time you need to do some simple things – like goal setting, creating a financial inventory, etc. whereas a journalist ends up giving ‘tips’ on which share to buy or which mutual fund to pick. For doing this he is aided by websites (nationally valuresearchonline.com and internationally Morningstar.com) which do a fantastic job of using the past data.

Unfortunately they come with a plug line ‘past is not an indicator of future performance’. Though of course for most of the investors and advisors what some of these funds say is the basis of creating ‘future’ portfolios, usually to the detriment of the ‘poor’ investor. In fact stories like “Ten best funds to invest TODAY” are great on the cover of a magazine but do precious little to ‘educate’ the real investor. Topics like asset allocation, risk analysis, compounding, indexing, etc. are surely not cover story material at all. That unfortunately is perhaps what the retail investor needs!

Media does not employ specialists – the person covering mutual funds covers banking, life insurance, car loans, and everything in personal finance. This person is completely out of breadth – from where will they find depth?

When an an expert speaks on television – it sounds more like weather prediction or astrology. The take away for the viewer is almost nothing. For example I have caught myself saying “Before you invest you should do a proper fundamental analysis of the company”. Take a worse statement “Frankly this share looks very weak fundamentally, but technically I do not know whether it is a good time to sell or some upside is still left”. This may be a perfectly accurate statement, but it is utterly useless for the common investor.

There is a huge conflict between what is good for the investor (not trader) and what the financial services industry wants him to do. Warren Buffet says ‘inaction’ for long periods of time is a sensible strategy to adopt. However the media can make you feel rotten for doing nothing. Programs are titled “Is it time to switch from Equity funds to Gold funds” – this is enough for the retail investor to start twitching his thumbs and call his ‘adviser’ who will help him churn. In a rising market – analysts, media and the end user of the information (for whom purportedly the information is being sought, analyzed and delivered) are all optimistic about the company prediction. It is exactly the opposite in a falling market. Does the media coverage of a single share create more volatility in ‘trading’ markets? I do not have enough evidence to speak for or against this.

One fantastic exercise a retail investor can do. Invest in a 200 page note book and see what each person coming to the channel (or writes) says. Make a summary and read it after 6 months. You might have a humor book on your hand. Maybe the publisher may pay you a nice round sum which you can use as a retirement plan.

If on television you hear me telling one viewer “you should reduce your exposure to Kotak K-30 and use the proceeds to invest in Franklin India Prima” and tell another viewer “you should sell your Franklin India Prima and invest in Kotak K-30” am I contradicting myself? No. One viewer may be shifting from large cap to mid-cap and the other shifting from mid cap to large cap schemes. Imagine the plight of a viewer, especially if he is making notes.

Normally in sectoral funds you should be buying it only when everybody is shunning it – which means when it is languishing at some low net asset value. Currently for example if everybody is pushing an infrastructure fund, maybe as an investor should be looking at a FMCG fund or a pharma fund! So the inherent conflict between advising, media and selling comes to the fore.

For a seasoned investor magazines and television come across as a series of advertisements – some obvious and some not so obvious. So to make out the difference between advice, and noise is significantly difficult if not impossible.

Most magazines (and channels) can rarely make out the difference between ‘traders’ and ‘investors’ – which means you will hear statements like – Investors will benefit by a reduction (or abolition) of securities trading tax. Frankly investors should not be worried about transaction costs at all – it is for the traders to worry about transaction costs. There can be many such examples to quote from.

Investment advice is very simple – but has to be delivered in a different way for each of the recipient. At times it has to be delivered like a teacher, sometimes like a friend, and sometimes like a child to a parent – and sometimes like a parent to a child. It is difficult for mass media to do this consistently and for a long period of time. At times the end user may not find it palatable, but deliver you must. Like a doctor giving bitter medicines to a patient or a mother mixing bitter medicines with honey so that it can be eaten.

In case of a magazine the editorial is clearly in a different location from the articles and the advertisement. In case of television unfortunately that distinction is impossible to make – in most times for the journos themselves! There is no website or magazine which ever checks the ideas given by ‘an expert’ after some time – say 4-6 weeks or on the happening of an event.

So if your teacher is the pink paper or a television channel, please have a plan B for retirement – it will be too late by the time you can correct!

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I asked her how much has she paid on the credit card…she said Rs. 1600. Then I found that she was paying ONLY 5% OF THE AMOUNT OWNED – because that FIGURE was in BIG, BLACK AND BOLD! Then she paid off Rs. 32,000.

This of course is an extreme case, but there are many howlers. One girl about to join for her MBA was doing an SIP in an equity fund. Now when she needed money, she found her NAV at 50% of her investments. Both aggression and pessimissum can be bad for a portfolio. If you know exactly when you need the money you are normally better off in a debt instrument if the period is less than 3 years. Only if you have a vague idea – and say the period is 10+ years away should you think of an equity fund.

If you have a personal loan (or worse credit card debt @ 51% p.a. from the bank which does not let people sleep), a car loan, etc. I am not sure that you should be investing at all! Partially yes perhaps, but normally investing makes sense only when you have just a home mortgage. Most other loans are likely to be expensive and tax unfriendly.

So it is really very difficult to give one short answer. It really depends on case to case. For a 23 year old girl who wants to do her MBA 2 years hence, and fund her marriage expenses (at least partially)….bank recurring deposit or A MIP (with 20% in equity) is not a bad option at all. STAY AWAY FROM EQUITIES!

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I explained that when you have too much of your money in one or 2 companies it was concentration risk. This normally happens when people have been investing for long periods of time. Let us say you put Rs. 10,000 in Infosys in 1993. It was a small amount at that point in time, but now it has grown to Rs. 1 crore. However now if your broker calls you and asks you to buy NTPC you dare to buy only 1000 shares – Rs. 200,000 BECAUSE you are too scared to put more than that in one company! This happens because you may not consider yourself ‘deserving’ that Rs. 1 crore! It is psychological, but if your total portfolio is today worth say Rs. 1.2 crores, you have A HUGELY concentrated portfolio.

However the risk of ‘over diversification’ is when you spread yourself too thin – you put a small amount in too many funds and many companies.

This investor was thoroughly confused. He thought either there could be a concentration risk or ‘over-diversification’ risk. How could this co-exist?

Well out of his portfolio of 52 direct investments, the top 3 made up of 54% of the total corpus. Most of the other shares were between 0.07% to 7% of his portfolio. In fact about 35 shares were under 1% of the total portfolio. His mutual fund portfolio was a bigger mess – he had too may schemes. This does not help reduce risk. Almost all his finance lessons seem to have come from questionable sources.

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Most of the “killer” diseases have been eradicated or a cure found for. If you are in a household mentioned above, at your age of 72 years, you will still have to worry about inflation!

You will have to worry about – inflation, a long term care insurance (which will take care of your hospitalisation bills, day care, etc.), and a pension that takes care of all your needs – even if it needs a manager to take care of your money. I know one 72 year old who likes to keep all his money in savings accounts and bank fixed deposits. Asking him to invest in any other asset class is a nightmare and another 80 year old who happily keeps all his money in equity – his dividend income is far, far greater than his requirements.

Both may be extreme cases, but a 72 year old has a serious possibilities of living till the age of say 90 – in such a case – inflation is a serious worry.

May God bless his soul, but I hope he dies by the time he is 78, because I expect him to exhaust his savings – and he is not at all keen to take anything from his children.

In the course of my consulting I meet all kinds of people – excessively into equity, and excessively into real estate, debt etc. Please read about asset allocation and go only for a balanced portfolio – nor more than 60% in volatile assets like equities or real estate.

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