Saturday, 16 March 2019

Why Investors Should Beware of the Media

Analysts and investors pride themselves in being genuine about their thinking and research. But that’s not always the case. At a subconscious level, they are not just influenced but driven by the media. Many of them will shake their heads on reading this, but as I said, it happens at the subconscious level, so you don’t know that you are being controlled.

The media feeds on our fears, anxieties and the tendency to pay attention to what’s abnormal. That’s why it seldom reports what’s normal. If it’s normal, nobody wants to hear it. That’s why, there is so much importance given to “breaking news” or being the first to break a story. The recent Union Budget again saw the media trying to outguess the budget provisions. When a couple of them proved to be right, the media patted itself on the back. With the general election scheduled in a month, the media is again try to predict the future.    

What’s the need for all this? Why can’t we wait for the event to conclude and wait for the outcome? The media then can do the reporting. But then there will be no thrill, perhaps. 

The latest news flow in a couple of stocks is another example of how the media controls the narrative. A leading housing-finance company is the latest prey of media monsters. Nothing that has been said against the company has been proved yet, but the effect is visible in the company’s stock price. Analysts are falling over themselves to find problems with the company. The same analysts were earlier recommending the stock on TV.

The real problem is not the unfettered criticism by the media. To some extent, it’s essential to ensure transparency and check corruption. The problem is that this rebuke can cascade into reality. The same housing-finance company has seen its bonds downgraded and its stock dumped by institutions. After all, who wants to take the risk? This itself can cause substantial damage to the business and shareholders.

What’s the solution then? Take the media to task. It shouldn’t be allowed to escape after making false allegations that result in loss of money or reputation. The media company should be made to pay the damages if its report turns out to be wrong. This will also make the media more accountable. 

It doesn’t take much to malign a company or an entrepreneur; any idiot can do that. But it does take a lot of effort and years of toil to build a company, on which many people depend for their livelihood.

Friday, 1 March 2019

Mistakes Investors Make in the Stock Market #1: Being Penny Wise and Pound Foolish

No one wants to lose money. Yet many investors make losses in the market. While it’s not abnormal to make losses per se, many investors increase their losses due to their own behaviour. They do so by hinging themselves to their buying prices. If a company has started to perform poorly, investors still want to somehow get back their buying price, which may or may not come. 

Even if the stock hovers about their buying price, they don’t want to sell the stock so that they don’t make any loss at all. Often they find that after coming close to their buying price, the stock moves several percentage points down. You can imagine the frustration. Eventually, they decide to sell at a much larger loss. That’s being penny wise and pound foolish.

The stock price is a dynamic element. It changes every second. You can’t rely on it to act in your favour. The solution to the problem is to be comfortable with small losses. Consider them as insurance against a sudden fall in the stock. If you must exit a stock and Mr Market offers you a price a few points lower than your buying price, don’t hesitate to accept it. Mr Market may not offer you the same price tomorrow.

Another useful tactic is to sell in tranches. For instance, if you are down 20 percent, sell half of your holdings. If the stock appreciates and you are down just 10 per cent, sell the rest. Your overall loss will be less as compared to if you had sold out entirely when you were down 20 per cent.

Losses in the market are perfectly okay. You can’t expect to make money on all your stocks. Some will indeed go sour. In such cases, formulate a loss-containment strategy and don’t be too finicky about getting back your buying price.

Sunday, 17 February 2019

The Industry of Tomorrow #1

Personally, as an investor, I don’t like taking subjective calls on the fate of industries. In my view, such calls frequently go wrong and do nothing more than giving a false sense of control to the analyst. Yet here I am going to discuss some trends that can have a significant impact on how business is done in future. These trends may not have an investment implication, so don’t start looking for investment opportunities. But they do carry an entrepreneurial insight and are also useful for the consumer. If not anything, consider them as my musings.

The privacy industry is going to get prominence in the future. Businesses that develop the reputation of guarding your data with their lives will have an edge over others. Those that develop a reputation of being careless with your data are going to lose trust to the extent that their survival will be in jeopardy. If you are thinking about Apple and Facebook as the examples for the two kinds of businesses, you are on the right track. Apple is seen as a champion of data privacy and every day Facebook is in news for some sort of data leak.

An interesting aspect of the need for privacy will be that businesses can start charging extra for enhanced data protection. Many of us will be willing to pay. Yet another interesting angle would be people paying money to search engines to “forget them.” Or could it be a subscription plan? For forgetting you for one year, you have to pay $100!

What about the consumer? The average consumer has been beguiled by tech giants to compromise his/her privacy. They are making money off your private information in ways you can’t imagine. Surely, there are no free lunches. When Facebook or WhatsApp lets you create a “free” account, it isn’t free. You pay a high cost. Your personal information (including pictures, videos and what not) are out there for everyone to see. And most of us rejoice in calling this “social” media.

The smart consumer will be he who will not let the privacy mongers raid his personal life. That means part or full abstinence from social media and judicious use of the internet—Of course, coupled with that annual subscription plan by Google to forget you!

Saturday, 29 September 2018

What to Do in NBFC Stocks Now

The recent IL&FS crisis has seen many NBFC stocks fall, with DHFL losing more than half its value. As always, investors are confused about what they should do. Should they hold onto their NBFC stocks? Should they buy them or buy them more? 

Analysts and brokers are turning “cautious” of the NBFC segment, which is natural for them, given their work profile. If they turn bullish on NBFC stocks and they fall more, they lose face. If they rise from here, they can always say that they were cautious, not bearish. All in all, there are no easy answers for our average investor.

Crazy things happen in the market and the crash in NBFCs is one of them. But at the same time, you should avoid the temptation of rejecting whatever is happening as complete bullshit. You must acknowledge the fact that you are dealing with uncertainty and things can certainly go against your judgement. 

So what to do? 

Do you own NBFCs? If yes, no need to sell them. 

Should you buy more of an NBFC in your portfolio? Check your investment strategy. Does it allow you to buy more? If you have already reached your maximum allocation to a NBFC stock in your portfolio, you shouldn’t buy more, no matter how attractive it looks.

Should you load up on NBFCs, given their attractive valuations? Use your good judgment. Don’t make any one sector a large part of your portfolio.

Should you make an entry into the NBFC space if you don’t have any stock of that sector? Absolutely. The current mispricing is an opportunity to add this sector to your portfolio.

Finally, as a general rule, don’t allow the market to tell you when to buy or sell. Do so when your strategy permits so. What if you don’t have a strategy? Well then… that’s the real crisis.  

Saturday, 15 July 2017

One Quality that Can Make You Rich

Most of us want to get rich. Yet most won’t. Though there are many factors that determine whether you become rich or poor, one factor stands out for its simplicity: simplicity itself.

Those who are simple have an edge over others when it comes to getting rich. To put simply, the least your requirements to stay satisfied, the simpler you are. Alas, simplicity is fast disappearing from the current consumption-oriented generation.

The urgency to acquire luxuries has corrupted many a youth. Many people live by credit. Many of us have the false feeling that we can’t be happy if don’t have something. From that expensive phone to that dream vacation, there are several avenues that make us feel inadequate. What’s more, even if a desire is satisfied, it is quickly replaced by another and the cycle repeats itself.

A lack of simplicity keeps most of us financially weak. With so many distractions, it’s hard to build wealth. Is there any solution? Yes, but adults will increasingly find it difficult to implement. Adults, because they are adults, come to believe that their lifestyle is a given and it can’t be altered. If you questioned their reckless lifestyle, they would go to any length to convince you that nothing much could be done. Their lifestyles own them; it’s not the other way round.

For those who still want to gain control over their lives, here is the first step: restore simplicity. Take someone else’s help if needed. Recognize what can be cut from your present lifestyle that will help you save more. Still better, save first and then spend. You will naturally have less remaining, which will force you to tone down your lifestyle.

Another solution: give huge importance to being simple and to saving. Once you shift your priorities to make simplicity your buzzword, you will be automatically inclined to save more.

Indeed, the most effective things are also the simplest.  

Saturday, 27 May 2017

How to Be Greedy in the Stock Market and Still Win

Recently while I was talking to a colleague about a promising stock, he told me the story of the greedy dog. Once upon a time a dog was passing through a narrow bridge over a stream. He had a bone in his mouth. As he looked down, he saw his own image in the water. But he felt that it was another dog with a bone in his mouth. In order to get the bone from the “other” dog, he started to bark. As soon as he opened his mouth, the bone fell out of his mouth and into the water. The dog regretted his foolishness.

With this story, my colleague wanted to give the message that one should be contented with what one has and should not be greedy. So he turned down the idea of buying the stock I was talking about.
There is a general and a specific lesson in this anecdote. The general lesson is to avoid analogies. Those who take help of analogies to explain their point are just twisting the facts to suit their own case. Just because the dog lost its bone doesn’t mean that you have to be satisfied with what you have. What the dog did is the dog’s problem, not yours. 

The specific lesson is regarding “greed” in the stock market. Many investors attribute their stock returns to luck. Others are content with small returns and consider waiting for higher returns as being greedy. The person whom I talked about earlier considered investing in the stock as being greedy. All in all, the idea of greed is highly misunderstood in the context of the stock market.

In the stock market, it’s perfectly okay to hold onto a good stock for long times in anticipation of higher returns. That’s not greed. Indeed, you find multibaggers only when you are invested in a company for long durations of time and refuse to sell your stock prematurely. Similarly, while luck does play a part in almost anything in life, it’s not just luck that makes you successful with stocks. You need to do much more than simply rely on luck to get successful in the stock market. Finally, exploring new ideas and opportunities is the basic requisite for progress. It has nothing to do with greed. All that the stock investor needs to be careful of is being optimistic without any basis. That’s greed.

Friday, 12 May 2017

Silly Things People Say about Money #2

When a person told me this, I first felt that she was kidding me: “I want to get into debt so that I can build a good credit history.” Later I realized that she was indeed serious. I got to hear a similar thing from a couple of more people. I was astonished at their idea of financial prudence.

The last decade has seen the rise of the financial-planning industry and its associated caprice. There is at least one company that rates you on your credit worthiness. Many people are eager to maintain a good credit score so that they can easily get into more debt. Recently a salesman asked me if I used a credit card and hence if I had a credit history. I don’t use a credit card.

Should you worry about your “credit history”? Absolutely, you should. But not because you need a good “credit score.” If you have borrowed money, you must honor your commitment and pay the money back. That goes without saying. What is even more important is that you cultivate good financial habits. Being financially strong is more important than worrying about credit history.

How do you become financially strong? By following the old, common-sense principles of money. Save more. Control your expenses like crazy. Avoid debt. Learn about business and investing. Invest more. Reinvest the profits. Keep repeating the process.

Sounds boring, isn’t it? The most effective things are also the simplest. There is nothing thrilling about them. Those who follow the traditional financial wisdom don’t have to worry about their credit history. They can buy anything anytime without getting into debt. Actually, they are the ideal customers for any business, given their financial might.

The only purpose your focus on credit profile serves is that it reminds you that you are focusing on just the wrong thing.