Sunday, November 30, 2014

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.

Investors have adopted the same habit which they apply while going to a restaurant asking the waiter which food item is the best. We must know that as a lawyer, doctor require special knowledge for their own profession in the similar line you need to know about investments. The biggest mistake we do while doing investments is that with limited knowledge and intelligence and no special Information we try to play beat the game market. Our equity investments are just like surgeons who do surgery without knowledge of surgery.  

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