Category: Opinion

As the government decides to sell stakes in PSUs in the coming months, you are going to see a slew of companies coming out with their stock offering and with the current economic environment, it is very easy to get carried away and invest a disproportionate amount of money in IPOs.

I’m already seeing the excitement around IPOs build up although the retail participation so far has been nothing compared to what we have seen in the past.

If you remember the MOIL IPO – the retail part of that was subscribed about 3o times over! 

For most people, it is ridiculous to think about something that happened two years ago, and guess what? Most people continue to make the same mistakes over and over again.

Nothing about IPO investment has changed, and in the coming months, you will most likely see sentiment pick up and over-subscription levels reach ridiculous highs.

When that happens, consider this chart that I made over two years ago.

 

What this chart shows is that the number of IPOs rise when the market conditions improve, and that makes total sense when you think about it. Promoters are interested to extract maximum value out of their stakes and why would anyone who can wait sell their stakes when the markets aren’t doing well?

But at the same time, when the market goes down, all these stocks also go down with it, and that results losses on stocks you bought in IPOs and also much worse, stocks that you bought just after the IPO.

I took the MOIL example for this post because the company was doing and is doing quite well and the oversubscription was so high that people got allocated only a few shares, and then after listing bought more of it, and suffered losses on those too.

As the frenzy surrounds you in the next few months –  be patient and at the very minimum avoid investing in any IPOs that have bad fundamentals.

As the year draws to a close, I’m sure everyone is feeling quite pleased with their portfolios. I don’t see anything that has gone down this year, and I think this is one of those years where you couldn’t have lost money even if you wanted to.

Zooming out a little, things aren’t so rosy, India is at about the same level as it was five years ago (actually -3.14%), and if you regularly invested in the market in this time, you would have had negative real returns at this point.

However, when I look at my own portfolio, which has always entirely consisted of stocks or cash – things haven’t been that bad. (In this time period, I have invested in both US and Indian equity markets.)

I am very glad to be lucky in this respect, but the one thing that I have seen in the past few years is that your returns are not linear and gains as well as losses will be concentrated in a short time frame, and you should be properly positioned for those time periods.

Most people lose money because they start investing at the wrong time, and then compound things by getting into penny stocks, and other momentum trades which ultimately pan out very badly.

For example, I see a lot of people talking about stocks, and boasting about their investments right now when the market has already risen so much. These very people likely stopped investing last year when the market was doing badly and presented a great opportunity to buy.

When the market goes down again (which it eventually will) you will see the same people talking about exiting stocks completely, and talking as if stocks will never recover. That will be the best time to invest, but I’m fairly certain that majority of the investors will either be pruning down investments at that time or selling out completely.

This is nothing new and has been talked about by people zillions of time, but somehow when the market is up, people think that they will easily able to stomach a 20% fall, but when the fall materializes, they just completely panic.

The way 2012 has panned out makes me feel that investing regularly is not enough, you really need to take advantage of the bad times or the times of crisis. If you aren’t aggressively buying during crisis periods, the volatility and high blood pressure that the market brings you will never be worth the returns you make from it.   At the same time you need to temper down when the market is up, and when your neighbor and his dog are making a killing in the market. As far as the market is concerned, nothing is worse than following the herd.

Rplan UK published a great infographic featuring some of the greatest investors of our times, and some interesting bits of information about them.

I learned many new things about them which I didn’t know earlier, and it was fun to revisit stuff that I already knew. Perhaps the best bit is about George Soros breaking the Bank of England, and here’s a good Telegraph story for anyone who wants to read more.

Two other things that I particularly liked in this was the emphasis on time not timing by some of these greats, and the idea about certainty belonging to maths, not markets, that’s something I had not heard earlier.

Enjoy this great infographic, and thanks to Rplan for allowing me to publish it!

It feels great to be able to wish all of you a very happy Diwali once again!

As we come close to the end of the year, I’m glad that it has been better in terms of economic circumstances than last year, and hopefully the last few days of this year will pass by uneventfully as well.

There are two things that come to mind when I reflect on the year that’s almost gone. First is that you really have to take a much longer term view of things than you’re usually inclined to do. If you remember this time last year, you will remember how negative everyone was on the markets, and in less than twelve months all that has changed. Anyone who just focused on the short term during that time lost on a very good opportunity to invest in the markets.

The second thing is to focus on the things that you can control and not worry about things that are out of your control. There is nothing you can do if the whole of Europe goes into depression tomorrow or if Dubai defaults but there is a lot you can do to save an extra 1000 bucks every month so that’s where your focus should really be.

A happy Diwali to all OneMint readers! May you live long and prosper!

I feel that one strange thing about the stock market is that it is most attractive to those people who are most likely to lose money on it. I first invested (rather speculated)  just before the dot com burst, and the only reason I was attracted to the market was fast money.

Guess what? The people who are attracted to fast money are the most likely to buy penny stocks, momentum stocks, “sure-shot” stocks, day trading stocks and generally anything that has a good chance of going to zero.

I think I must have invested in all these type of stocks at the time, and I can’t remember if anything ever went to zero, but it certainly came close to it.

I was reminded of that time because of this email I received last week.

Hi,

I have been following your blog since long and have learnt a lot of things. Now i thought i should ask you something to help me financially.

Looking forward to your reply.

To invest in intra day is a lot of work and i dont know much about investing. Now are there institutions out there where i can invest my money in or any share broker who i can trust with my money and he in turn reinvest it in intra day trades… Or any service that provides intra day tips???

I understand this a question from a noob but then again.. Please do reply.

I made a brief reply cautioning the reader against doing this because these type of things just don’t work, and you can meet hundreds of people who have lost money this way.

If you don’t know anything about the markets then it is better to invest in a well known mutual fund regularly rather than taking your money and giving it to someone who promises to double it in a year doing intra day trading.

If they could really make money like that they would be doing that with their own money, and not seeking capital from others.

People who sell intra-day tips are even more inexplicable; if their tips are so good, why aren’t they acting on them instead of giving them out for a fee?

Short term predictions hardly ever work. Before putting your own money, you can very easily create a fake portfolio and follow the advice of “pundits” who predict market movements and see where it leads you. Do this for three months and see the results before putting your real money in day trading.

Most pundits advise you to buy when the stock market is up and sell when it is down, which is the exact opposite of what you should be doing.

I don’t know of an easy way of doing this but it will be fun and enlightening to see what traders and pundits were Tweeting out about this time last year, when the market was really bad, and in hindsight, also presented a good opportunity to buy. I think you will find that none of them were too enthusiastic about stocks at the time.

If you want to trade, at the very minimum, you should be willing to spend the time needed to understand what trading strategy is being followed and ensure that you aren’t being taken for a ride by people who are just punching buy and sell orders on a whim.

This is difficult but at least it will give you the comfort of knowing what’s happening with your money. There are trader conferences that you can attend and while you will never find that information on OneMint, there are other blogs and websites that you can read to get that information. If you are attracted towards trading then you must spend the time before spending the money.

I hope regular readers are surprised by the title of this article because this is not the kind of prediction I ever make, and philosophically, I feel that people should avoid “pundits” who make market predictions.

So, why the title? Because the following comment appeared on the Suggest a Topic page last week.

lalit October 7, 2012 at 10:07 pm [edit]

Nifty is up about 20% so far this year, and that means people are slowly getting back to talking about stocks. I see it on my Twitter, Facebook, personal circle and then of course the blog.

I saw an interesting comment from Mr. Ramamurthy the other day, and I thought I’d do a small post on the topic.

First, the comment.

Ramamurthy September 22, 2012 at 7:17 am [edit]

Many times I hear the argument that investing in Equity direct requires research and analysis. It may be necessary for a trader. But, for the long term investor, I don’t think it is. The theory is if do not have the required expertise, invest through mutual funds and avoid direct investing. I am a long term investor and I don’t do any technical analysis or detailed research before choosing the company to invest.I choose big companies with long history behind it. I choose the sector with which I am familiar with. This does not require much research. So far (last 8-10 years), this tactic has been good to me. I did investment through MF also. I withdrew from them after looking at their pathetic performance and after giving the a long rope (5 Years). Expertise of MF managers?

As I’ve written before, I am a retail investor who invests in stocks directly too, so I obviously don’t buy into the argument that small investors shouldn’t invest in stocks directly.

But I do believe that you run considerable risk when you buy individual stocks. If you buy a few mutual funds then probably the maximum exposure to any single stock is 6 or 7 percent, but if you own individual stocks then you may just own 10 or 15 and within those, you may be concentrated in a few companies. If that’s the case and something happens to one of your companies then your portfolio can take a big hit.

You can reduce this risk to some extent by investing in big companies with long histories but then we all know of big companies that have failed too. And even otherwise, often stocks fall 10 – 20 percent in day like IFCI fell yesterday so that will have a big effect on your portfolio if you owned such a stock.

If you’re at a stage in your life that you already have a huge corpus invested and you take a huge hit like the one I spoke of earlier then that can be devastating to your portfolio.

There are a few ways to get away from this risk (albeit not completely).

You can diversify this risk by owning a number of stocks and limiting your exposure to any single one by less than 5%.

Holding cash so you can invest in times of crisis like last year also helps alleviate this risk because you will be able to buy stocks at a low price. This also helps when there is an eventual rebound in the market because at that time you are inevitably sitting on gains.

Another way to alleviate the risk is to be invested in fundamentally strong companies which have little debt, no promoter pledges and a good track record with disclosure and governance. This also means you stay away from penny stocks and other shady companies.

However, at the end of the day there are risks that come from investing in equities directly, and you can only diversify them so much. If you are going to invest in stocks then know that things can always go wrong, and when they do, it’s your responsibility and no one else’s.

A common type of comment that I’ve seen over the years starts with describing a situation like planning for retirement, children’s eduction, wedding etc. and ends with asking about ways to save tax.

What is this obsession with saving taxes?

For a lot of people, specially if you are starting out and don’t have a lot of tax liability or savings, it may just be better to pay off your taxes instead of lock the money in an instrument that you can’t access for very long.

For a lot of other people who are earning so much that the 1 lakh 80C deduction doesn’t cover all of their tax liability, once you are done with it then what? Why fixate on other instruments that save tax? Why not broaden your search to include everything?

I don’t know when (if at all) Direct Tax Code will be implemented but I’m fairly certain that if you compared the first draft of DTC with whatever is going to get implemented it will be a lot different in terms of simplicity.

DTC was meant to bring in simplicity because all these weird clauses about perquisites and transportation allowance and tax saving schemes were just so hard to decipher and were creating perverse incentives so they removed all of those initially, and lowered the tax rate. But then they gradually increased the tax rates in each draft so now you may have a situation where the tax savings are gone but the rates are pretty much the same.

The reason I bring up DTC is because the environment has a lot to contribute to this mentality of not looking beyond saving taxes as the government comes up with something new that saves tax every year or two and that in turn creates an anticipation that something else is on the horizon that will aid in saving taxes, and then it permeates through other investing thought process as well.

I think a lot of people need to be reminded that saving tax is not an end in itself, maximizing returns is the end, and saving tax may assist in that, but all your energy shouldn’t be focused on it.

 

Since I linked to Rodinhood’s post on the weekend, I wanted to write my own post with a very good lesson that a Marwari friend taught me while we were in college.

He told me that his father used to complain that there is a lot of stress, and tension because of a land dispute with a neighbor and that it was taking a toll on his health.

My friend asked his dad – what’s the value of this land to which his dad replied it’s worth Rs. 50,000, and my friend said then that should be the limit to your worries.

You think about this land day and night, and talk to me about it every time I call as if this is the most important thing in your life, but it’s not, it’s a problem that can cause you a damage of Rs. 50,000 at the most, and you can’t ruin your health for a problem that’s not even worth a lakh.

I don’t know whether his father took the advice to heart, but to me, that was a very valuable lesson, and one that has helped me deal with small little things that bother some of my friends disproportionately.

One of my favorite examples of this is trying out a new restaurant. Some of my friends will research the menu, read reviews, call up people and still be undecided before trying out a new place to eat!

This is ridiculous because the most you stand to risk is a bad lunch that you will probably forget in a few hours, and a little money which you have decided to spend anyway. Is it wise to spend hours thinking about this?

I see many of these same people making big money mistakes like keeping a lot of cash in savings account, just owning one or two shares in the name of investments, or having no emergency funds at all. It seems to me that some people spend as much time thinking about a 100 rupee decision that they do on thinking about a 5000 rupee decision.

I think taking the time to think about how much you can lose because of a decision greatly helps in putting things into perspective and reduce anxiety as well as the tendency to become penny wise and pound foolish.

Gold prices are one area where I have been fantastically wrong; I’ve written twice about how I have stayed away from gold, and gold price movement during that time has shown how wrong I have been.

Kartavi left a comment the other day which illustrates this very well. Here is the comment.

Kartavi July 17, 2012 at 8:16 pm [edit]

Manshu,
You have posted on the topic ‘opinion on gold’, twice (March-09 and on October-10).
I think its time to review the opinion again. Please review in terms of indian rupee (and not USD) since whenever gold had come down (in USD) it has not down in INR due to Value of the rupee against USD. “Aare bhai, bahar ki duniya me sona gire ya chade… apne yanha to badhta hi hai…to chhote INVESTER ko kya karna chahia ?”
Regards,
Kartavi.

Here are the two posts about this:

Gold is the next bubble

My opinion on gold and silver

As a follow up, I would say that you shouldn’t seek my opinion on this because I have been so wrong on this already, and I don’t have much by the way of opinion also because my position on this is unchanged.

When something gets as popular as gold has for the last few years, it is natural for it to get the attention that it’s getting and more and more people flocking to it. Eventually, everything that grows disproportionately comes down as well, and in gold’s case I feel it is disproportionate but I have been proved wrong so far.

Kartavi makes a very good point of gold returns in INR and how the USD – INR price movement has impacted the price of gold. When you buy any asset that’s priced in a currency other than the INR, currency price movements make a difference and this is easy to understand with things like the Motilal Oswal NASDAQ ETF which rose a lot more than its underlying index NASDAQ due to Rupee depreciation, but I think it wasn’t very clear how big of a difference exchange rates make to gold prices before the movements of the last two years. But now it is quite clear that if the Rupee were to appreciate for some reason, gold will go down, by how much, no one knows. So, in taking a position on gold, you’re really taking two positions, one on USD-INR and the second on gold prices.