Friday, 2 December 2016

How to Get Rid of Demonetization Pains

Standing in long queues in front of banks seems to have become a full-time profession. People wake up early in the morning, get ready, pack their lunch boxes, and stand in bank queues to withdraw cash. With many employees receiving their salaries, normal snake-like queues are turning into anacondas. Some people have started “hoarding” cash for “bad” times. The political opposition has yet again found another agenda to not let the parliament work.

While the market seems to have recovered from the demonetization setback, the common man (and woman) remains in trouble. Fortunately, there’s a way out: go cashless. Though this solution looks rather obvious, yet it’s not accepted and appreciated both by people and businessmen as much as it should be. The real problem is not a lack of cash. The real problem is the unwillingness to adapt to the change.

Just imagine a scenario where most small businesses and sellers started accepting digital currency. Would the demonetization still look so grim? The other day a news channel was featuring a story that many small-business owners aren’t willing to accept digital cash; they want hard cash. These people who use expensive smartphones don’t want to accept digital payments. Why? Leaving out the tax-evasion angle, the only other explanation is that they are unwilling to adapt to the change. Their unwillingness is causing pains to the general public.

Kudos to those small-business owners who have switched to digital payments and quickly adapted to the change. They show the real flexibility that a true entrepreneur has. As a matter of fact, they have started to reap the benefits of digital before those who are still in their comfort zones. How fast others adapt themselves to digital will determine their existence in business.

Similar argument goes for the consumer also. Consumers should also switch to digital as soon as possible. They should seek out help if they have any reservations regarding it; children should help their parents to adapt to digital. As the business and the consumer push each other toward digital, what looks like insurmountable will turn easy. 

The demonetization has ruffled us out of our comfort zones. It’s time to see the brighter side rather than go after the government and criticize it for the bold step it has taken. Mind you, the world is watching.

Saturday, 19 November 2016

Should You Worry about the Demonetization?

The recent demonetization of Rs 500 and Rs 1,000 notes has again unleashed intellectuals, who are debating the positives and negatives of it. The obvious positive is the economic clean-up; the negative is a loss of jobs and the fears of a recession. The market has reacted sharply to the demonetization.

Similar to what I wrote for US election outcome in my previous blog, “How to Protect Your Portfolio from the US Election Outcome,” your best response to the demonetization is no response at all. Don’t let it derail your investments. Don’t wait for some “better” times to make your investments. Don’t exit the market in haste to cut your losses. Simply carry on with your investments normally.

The worst thing you can do in the current uncertainty is respond to it in any way. Many investors feel that it’s smart to sell out presently and buy again at lower levels. Don’t fall for this trap. That’s not smartness but outright fear. Volatility is a part and parcel of the stock market, and this is the time when you need to show some courage rather than run away. Those who run away now will soon find the market taking a U-turn and they will never be able to reenter it, for they will then fear about the market falling again.

The latest evidence of this lies in the way the market reacted on Trump’s victory. It did fall but the very same day, it recovered. What’s more, the US and European markets actually rose. It looked like the market was poking fun at those who had tried to outwit it.

Only time will tell whether the demonetization turns out to be good or not. For now, the financial community has found itself a new stressor to stay busy. If you must worry about something, worry about insulating yourself from the financial pundits.

Friday, 4 November 2016

How to Protect Your Portfolio from the US Election Outcome

US election results will be announced soon. It’s going to be either Hillary Clinton or Donald Trump. Experts are worried that if Trump wins, that could seriously roil the markets worldwide, including the Indian one. Trump has become infamous for his anti-trade, anti-globalization rhetoric, and since the US is an important market for many countries, his getting elected is quite worrisome. On the other hand, Clinton has earned the reputation of being the “politician next door”; not many things are going to change if she gets elected. Since markets hate uncertainty, Clinton’s win is what it wants.

As I write this, the gap between Trump’s and Clinton’s electoral numbers is narrowing. Clinton was ahead of Trump by several percentage points, but thanks to her email controversy, that difference is fast disappearing. The market has also sniffed the trouble in making and has quickly fallen a couple of percentage points. What should you do now? Every market pundit has a strategy to offer, which can only serve to confuse you even more.

Here is the only thing you need to do: Do nothing. Carry on with your investments as usual. If you have money to buy stocks, don’t wait for a better time. Don’t wait for more clarity to emerge. Simply keep investing.

As you may have noticed, there is always something troublesome going on in the market; that’s the way it has been. The financial community will always find something to worry about. Previously, it was Brexit. Still before that, it was the Chinese slowdown. And so on. Once US elections get over, the financial community will quickly find another stressor for itself. Finding new stressors and then musing about them is what earns bread for it, and it’s only natural that it will remain entangled in some event.

Coming to the US elections, I feel that the fears regarding Trump getting elected are overblown. What both political and economic analysts are underestimating is the power of institutions. The US is a strong democracy. Democracies aren’t run by a single person; they are run by the constitution. To me, what seems most likely to happen if Trump gets elected is that he will also be working like any other president, without any boom and bang. Pre-election promises and claims quickly get tapered as a person gets into the governance business. Running a government is altogether a different affair and no matter how much radical a person looks, in a democracy, he has to soon come to terms with reality. Apart from that, given his business acumen, Trump can actually prove good for the world and the US.

So, just digest the temporary volatility in the market and let this phase pass.

Saturday, 15 October 2016

The Mistake that Indian Small-Business Owners Have Been Making

I have seen quite a few small-business owners in India who want their children to study hard and get into some high-paying job. As the story goes, these people have themselves struggled a lot in their lives and hence they want their children to be shielded from what they had to face. Unknowingly, they are making a terrible mistake.

When business owners want their children to become employees, they are doing injustice both to their children and the nation. By shepherding their children to employment, they are taking away from them the opportunity to experience true freedom and prosperity; they are asking them to resign to a life of mediocrity. The economic development of any nation directly depends on entrepreneurs and small-business owners. In absence of them, a nation can’t progress. In absence of the jobs created by businesses and entrepreneurs, even small-business owners’ children can’t find a place to work.

So, what is required on the part of small-business owners is to motivate their children to take to small businesses or even join their own businesses. Also, just because small-business owners have seen tough times, it doesn’t mean that now they need to be overly protective about their children. On the contrary, they should keep their children in discipline so that they understand the importance of resources. Indulgent attitude toward their children can actually spoil them. They should be inspired to take risk and seek challenges. If given the right environment, their children can actually do very well in business, given the already-available platform.

Friday, 16 September 2016

Why Stock Analysts Should Hire Someone Else to Manage Their Money

Most investors equate stock analysis with making money in the stock market. In reality, these are two different things. Just because you are good at analyzing equities doesn't mean that you can make money off them. On the contrary, the more thoroughly you analyze stocks, the fewer are the chances that you will profit from them. Call it the stock-market paradox, if you will.

This doesn't mean that making money in the market is all about luck and fluke. It's not. But it's not about stock analysis either. The right answer lies somewhere in between. You do need to have some strategy for buying stocks, but analyzing stocks should not become an obsession. Stock-market investing is an art, not a science.

The market doesn't care about your analysis. It doesn't know how accomplished an analyst you are. All it cares about is certain triggers. For instance, companies that turn around see their stock prices racing. If your strategy can spot a turnaround in making, you can make money. Another trigger is rising profits and so on. Aligning yourself with what the market cares about is the secret of making money in the market.

Seeing everything from analytical perspective soon becomes an end in itself. The stock analyst forgets why he is there in the market. He is no longer making money but is getting deeper and deeper into a company's books. Naturally, this leads to analysis paralysis. The analyst can't act now. He just knows too much. Meanwhile, the stock keeps racing. Given that it has now gone up, the analyst enters into a dilemma if he should buy it now. The outcome is that he is left with reams of analysis but no money.

While the stock analyst can still keep analyzing stocks as a part of his job, he would do himself a great favor by leaving the money-making function to someone else.

Friday, 26 August 2016

The Market Is Overvalued. What Should You Do?

In February this year, I wrote the blog “The Bear Is on the Prowl. What Should You Do?” (See Interestingly, just a few months hence, market pundits are talking about an overvalued market. According to them, market indices are trading at all-time highs, and index P/Es have swelled. They feel this is the sign that the market could come down from here, perhaps sharply. The average investor is confused as ever.

One thing that becomes quite clear from the narrative above is that the market can quickly change its course even before you realize what's happening. In the blog post mentioned above, I advised that you should not worry about the market and wherever it's headed. The point still remains the same. Even if the market looks overvalued, that's not your problem. It's futile worrying about bad and good markets. 

As a stock investor, you just need to worry about the company you are going to invest in, not the market. The company should be able to clear your criteria and that’s that. And no matter what kind of market it is, there are always good investments available. Just because the index is trading above some historical average doesn't mean that you give the deserving company a miss.

Market pundits may disagree. They say that if the market falls, your “good” investment may fall as well. And they are right. In bear markets, almost all stocks fall. But no one knows when the market is going to fall or how much your stock will fall vis-a-vis the market (it may even continue going up while the market is falling). It is often seen that all the while experts are worrying about market levels, the market just keeps going up. 

The fear of a market fall is a big impediment to success in the stock market. Fearing a fall in market, many investors remain away from the market and miss the opportunity. Don’t let that happen. The best answer to an “overvalued” market is to do whatever you would have done if it weren't overvalued.      

Friday, 5 August 2016

Why Investors Miss Multi-Baggers

The other day I told a colleague about a little-known company that I hold in my portfolio. His reaction was: “It’s a dodgy company.” I enquired what he knew about the company. He knew nothing. But because he hadn’t heard of the company, that rang alarm bells for him. 

On another occasion, somebody asked me what company he could invest in. I suggested a name that he was not familiar with. He gave me a confused look and asked for another suggestion. I suggested to him a well-known large-cap stock, and he was happy because he “knew” this company.

For both experienced investors and amateurs, the familiarity with a company’s “name” is an important investment criterion, though they won’t confess it. They would prefer a company whose name they have heard of to a company that they don’t know. 

One can’t blame the investor community for this behavior. The reason for the inclination towards what’s familiar is psychological in nature. Familiarity breeds trust. And lack of it engenders caution. Naturally, investors turn cautious of what they haven’t heard of. But due to this psychological instinct, many great companies are skipped. These companies later turn out to be multi-baggers.

How do you overcome this problem? First, “curse” yourself. You don’t know enough, so you must not trust your own knowledge. Just because you haven’t heard of a company doesn’t make it a dodgy one. All it indicates is you have limited exposure and you don’t know. It’s plain ignorance—yours. Second, don’t stop at a company’s name. Study it and then make a judgment. While studying it, don’t begin with a negative impression of it. If you do, you will simply pick evidence that confirms your suspicion of it. That’s another psychological bias, called the confirmation bias.

In investing, psychology plays a more important than finance. Ignoring it and staying buried in finance books won’t get you anywhere. To spot multi-baggers, understand psychology more than IRR or CAGR or whatever. Is the analyst community listening?