The worst enemy of an investor is...

Mar 15, 2010

In this issue:
» Indian banks' NPAs to rise
» Is govt. doing enough to handle rising food prices?
» US, China fighting a war of words over Yuan
» Gold will be the last man standing, affirms Bill Bonner
» ...and more!!

------- FREE Newsletter -------
Dont't get tempted to gamble your savings on some 'hot tips'
Get The Honest Truth, the e-letter by Ajit Dayal, directly in your mailbox.
It's FREE. Sign Up Today.

The jury is still out on this. But a study from Vanguard, one of the world's leading mutual fund, suggests that women are better at investing than men! And what separates the two? Not wealth, not knowledge, but just the level of confidence!

The study was conducted among 2.7 m people with retirement accounts with the fund. And it found that during the financial crisis of 2008 and 2009, men were much more likely than women to sell their shares at stock market lows. Those sales presumably meant big losses - and missing the start of the market rally that began a year ago.

The co-author of the report John Ameriks, head of Vanguard Investment Counseling and Research, writes, "There's been a lot of academic research suggesting that men think they know what they're doing, even when they really don't know what they're doing."

On the other hand, he suggests that women appear more likely to acknowledge when they don't know something - like the direction of the stock market or about the price of a stock or a bond.

While we will not take sides on this one, the core idea that comes out of the study is that 'overconfidence' is bad for investors. We in fact believe it to be the investors' worst enemy. Overconfidence clouds the mind and leads investors to do what they would otherwise not do when they think rationally. Like putting one's entire faith behind a hot stock that everyone's saying, will double in a month's time!

But if the right kind of confidence or conviction in one's own study of a stock is mixed with action (buying that stock), an investor can look towards making good returns in the long run. After all, there are several wonderful long term investing opportunities available in the Indian markets today that are up for grabs.

 Chart of the day
Today's chart of the day shows how Indian companies are clawing back to good profit performance after the hit they received during the September 2008 to September 2009 period. While profits still grew strongly during this period (except during the quarter ended December 2008), it was largely on the back of lower operating and financial costs. Sales remained under pressure during this period. However, if the leading economic think-tank CMIE is to be believed, India Inc.'s sales performance will turn out to be good during the next 4-5 quarters. The agency in fact estimates sales to grow at an average rate of 18% over the next 5 quarters.

Source: CMIE

The Indian government's excesses have dealt a heavy blow to banks. Although with a noble intent, waiving off agricultural loans and extending period of partial repayment have almost rendered them as non performing assets (NPAs) for banks. These coupled with risky assets like personal loans and credit cards have resulted in banks accumulating plenty of non recoverable loans in this fiscal (FY10).

Although as a percentage of total loans, they may be having the cleanest asset quality globally, Indian banks do have to worry about 30% YoY growth in NPAs. Further, rating agency Fitch has pointed out that banks need to be wary of further slippage coming from Rs 307 bn of restructured loans in FY11. Thus while the banking sector has much to look forward to in terms of growth, the need to be cautious cannot be emphasized enough.

There is nothing right with the US economy going on now. Yes, the global crisis has hit the economy very hard but the government response to it is also not yielding the desired results. In an interesting interview with DNA, Bill Bonner, the founder and president of Agora Publishing, is of the view that the global crisis is unfolding very slowly. So it would not be right for people to assume that the crisis is completely over. In the US especially, accumulation of massive debt both at the individual and government level has meant that consumption will take some time in picking up. In a country, where unemployment is raging at 10%, expecting consumption to take off the way it did before the crisis would be folly.

Therefore, Mr. Bonner is of the view that the US and Britain have got their theories wrong. In such an environment, he has put his faith in gold. The reason? Paper money cannot be trusted. Stocks are overvalued. Commodities will be in the doldrums once the China bubble bursts. So gold as an alternative avenue of investment makes sense. Or as Mr. Bonner has expressed, "Gold will be the last man standing."

The high price of food is perhaps the number one economic headache facing the government right now. We usually blame rainfall and growing demand for the situation. But the question is - is the government doing enough to handle the situation?

The answer as you would expect is - no!

India's food distribution system is terribly flawed. A lot of food grains could be saved by just storing them better. For example, half of the wheat stock of Food Corporation of India is stored in the open. Much of it will rot or feed pests. The government is procuring another 24 m tonnes. All this will pile up. The mountain of wheat that goes waste is baffling. In our opinion, small steps could turn around India's high food price situation. Release the stock pile in small but regular intervals. Encourage private players to enter the system legally. Calibrate public distribution of ration and direct subsidies in the form of food coupons or direct transfers. But the most important immediate step should be preventing mountains of food grains from going waste.

The US and China are engaged in a duel of sorts. The point of contention is China's currency: the Yuan. The US is strongly of the view that the Yuan is undervalued due to the Chinese government's practice of artificially managing the foreign exchange rate at which its currency is converted to US dollars. Due to this, contends the US, the Yuan is being prevented from appreciating and is consequently hurting the US economy. This is because an undervalued Yuan is favourable for Chinese exporters. Combined with low cost labour, it renders Chinese products much more competitive when compared to US made ones. However, last week when US President Obama called on China to move to a 'more market-oriented exchange rate', Chinese authorities have been quick to retaliate.

Chinese authorities have completely rebuffed the US's claims that its currency is undervalued, and have made it clear that they have no intentions to let its currency appreciate. Economist Paul Krugman has estimated that global growth would be about 1.5% higher if China stopped restraining the value of the Yuan. With so much at stake, it will not be surprising to see US and Chinese relations deteriorate further in the days to come due to this one major bone of contention.

After a muted start today, Indian markets have managed to move above the dotted line in the final hour as investors lapped up in heavyweights from the IT and FMCG sectors. Stocks from the realty and pharma sectors are, however, not finding many buyers. The benchmark index, the BSE-Sensex was up by around 2 points at the time of writing, while its smaller peers, the BSE- Midcap and the BSE- Smallcap indices were down 0.7% and0.6% respectively. India is currently lagging the gainers in Asian markets.

 Today's investing mantra
"In this business (investing) if you're good, you're right six times out of ten. You're never going to be right nine times out of ten." - Peter Lynch

Today's Premium Edition.

Recent Articles

All Good Things Come to an End... April 8, 2020
Why your favourite e-letter won't reach you every week day.
A Safe Stock to Lockdown Now April 2, 2020
The market crashc has made strong, established brands attractive. Here's a stock to make the most of this opportunity...
One Stock that is All Charged Up for the Post Coronavirus Rebound April 1, 2020
A stock with strong moat is currently trading near 5-year lows.
Sorry Warren Buffett, I'm Following This Man Instead of You in 2020 March 30, 2020
This man warned of an impending market correction while everyone else was celebrating the renewed optimism in early 2020...

Equitymaster requests your view! Post a comment on "The worst enemy of an investor is...". Click here!

7 Responses to "The worst enemy of an investor is..."

Jayaraman Theeyarath

Mar 17, 2010

Your view, on the wastage of food grains in our publically owned granarys, is indeed the most critcal aspect which need to be tackled on WAR FOOTING. Surely this alone can feed many millions and bring down the galloping price rise in wheat, rice and many other articlesof mass consumption, immediately.
Are people in power listening and be ready to act?



Mar 17, 2010

I totally agree with the study conducted by Vanguard, estblishing women as more prudent investors. I will go a step further and and say, they make more rational and balanced decisions in all walks of life. I have many personal examples to quote. One such, I put down here. I was in a financial crisis to support our son to complete his MBA program, some 06 years back. I had a piece of land and wanted to dispose it of to supplement the expenses referred above. My wife stood like a rock between me and the sale of the piece of land! And i had to find other means to support our son's education. Alas after three years or so when I sold the land I got a return more than 05 times of the value 06 years back!! This is only one of my many experiences.
There fore my advise, to all men, is to listen to their better half and have the humility to give due weightage to their advise, you will be invariably a GAINER!



Mar 16, 2010

The day's wrapup(March 15) contains valuable information and good piece of advice.

Vanguard's finding that women in general are better than men at investing seems to be right. Cool head is one of their valuable assets and this trait stands them in good stead at times of need. There seems to be absolutely no exaggeration in terming married women 'better halves'.

Over confidence is our enemy number one. As rightly pointed out, one should not put all one's eggs in one basket, because involved in it is the risk of incurring heavy loss. Venturing into stock market dealings based on hearsay tips is most risky. There is absolute need for acquiring basic knowledge about the fundamentals of the companies whose shares we intend to buy, before venturing to make investments.



Mar 15, 2010

Very nice & knowledgable writing. Nice to read and understand holistic picture.



Mar 15, 2010

if china can keep its currency undervalued and boost exports(looks even US is helpless and only whining) why cant India do the same?why our PM who is otherwise an honest person go out of his way to protect US interests? what is at work here? anybody can throw light on this?


Kersi Mahudawala

Mar 15, 2010

I fully agree with investing mantra of Peter Lynch that you can not be right nine times out of ten and even if you are right six times out of ten your gain will be more than sufficient to compensate the risk you have taken.



Mar 15, 2010

Analysis of facts and news must be correct and up to date. But, overconfidence must be avoided. This is true. Overconfidence is indicated by our effort to defend the stock emotionally - even against all bad news - without looking at their effect rationally.

Equitymaster requests your view! Post a comment on "The worst enemy of an investor is...". Click here!