BEAT THE MARKET...INVESTORS MISTAKES...SERIES 1
Investor behavior changes when
the bull rally of the market begins. In my latest research I have found the
various angles of the investor behavior which bring miseries and pains later on
after plunging into the equity market syndrome of Beat the Market. I will be
discussing the same in elaborate fashion in couple of series. I request my readers
to read the same since it will be of great help to avoid the traps and temptation
mistakes. I will explain you how we tend to become long term investors and end up with losses.
Investor appetite is back on the
street where even the cobbler on the street is looking forward for parking his
money into equity markets to make something more than the Piggy Bank or the
savings account rate of interest. After a lackluster equity market over the
last 3 year and a weak economic growth created a well strong hunger among
investors to look for some better returns. The fact is that we are not looking
forward for better return but we are looking for the investment options where
we take more risk beyond the capacity and make over the opportunity lost
returns over the last 3 years.
I hear that investors discuss
that we lost the opportunity to become rich during 2004-2008 but this time we
will not afford to repeat the same and hence plunge into the equity markets to
become rich. Pledge your house, pledge your gold and redeem all your fixed
deposits and savings and invest in Equity. This was the strategy played by the
equity investors during 2004-2008.
Margin funding the best weapon of tempting investors to pledge
everything and take over exposure over their risk taking capacity have been one
of the most common devastation tools of the equity investments. When market
falls investors don’t have water in their eyes to cry out. I have seen in my
last 11 years of experience that many families got ruined due to the excessive
greed and breaching too far from their risk taking capacity.
Risk taking capacity has two
aspects one is the level to which one can bear the loss to his capitol and secondly
how much one can absorb the same in real terms.
Taking over risk is not character of the Indian equity investors but it’s
a GLOBAL phenomena. If we get back to 2008 we will remember the company name
madoff which got bailed out. Investors burnt their fingers since they did not
get into the details of the company and its operations and just invested as it
was able to beat long term bonds and short term bonds from 2001 to 2007. The
same story here that looking more from the safe investments and investing 100%
into the same. We forget that there is word called Asset Allocation which needs
to be maintained at every step. In my recent interaction with a group of
investors I learnt that Asset Allocation is for bad times of the market and
economy and when the economy and market looks like India currently then we need
to invest 100% into equity to get maximum return out of the same.
Well I leave the above testimony
to be justified by my fellow readers. What I am trying here is that we are
again getting carried away and focusing aggressively on equity and forgetting
the rules of asset allocation. In my 11 years I have found that emotions play a
vital role behind the equity investments across the globe. Risk is always neglected
and emotion takes 100% hold while doing investments. We love to hear to
discussion where winning stories of profit making is being discussed. We stimulate
our hormones through these success stories so that we breach our risk and
plunge into 100% equity investments.
We need to figure out why we take
these rational decisions for investing. Well we are all trying to beat the benchmark
index and create a separate investment return
or rather I would put this that beat the market and common man risk taking
capacity. Fund managers across the globe have been taking the same route as
beat the common index and breach new height of risk taking capacity is the essence
of the game. We share stories of profits where money has doubled but we never
turn towards the losers. We investors follow a pattern while doing investments. We start with good news but we end up with our lives,
Fixed Deposits and Bonds are the
places where we find rate of interest of highly risk products around 11% to 14%
carrying without any ratings. Whereas good rating FD products carry a rate of interest
of around 9% to 10%. But we all know that we all prefer to invest in 11% to 14%
based FD products. We never tend to understand why the company is paying so
high and what business and what are their financial conditions. Now a argument would
come where one will say that we are common man traveling in train and etc, how
we will know the same. More over weak education over the last 3 decades has
eroded the knowledge power of the investors hence it become quite dark for
these investors to know such things. Brokers take the advantage of the same and
play with the investors. The best examples
of these plays are the Insurance products which have been sold as miss-selling
just by taking advantage of your low knowledge base.