Are you making this common investing mistake?

Dec 6, 2010

In this issue:
» What's fueling the surge in gold prices?
» India driving prices of two prized commodities
» Will release more cheap money if desired, affirms Bernanke
» India Inc. rides high on the M&A trail
» ...and more!!

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"I knew the crisis is coming, but still did not sell my stocks in January 2008!"
"I knew stocks were so cheap, but could not gather enough courage to buy them in March 2009."

Aren't these the two common blames you put on yourself as you look back over the past 2-3 years? At least this is what we hear from most investors of how they missed the crisis and then the rally - despite knowing that both were coming!

Well, the problem here is that these people 'think' that they knew what was coming in 2008 and 2009. And that's what is called 'hindsight'. The hindsight bias is a very common problem with most investors. This makes them see events that have occurred as being more predictable than they were before they took place.

This is one of the biggest mistakes that investors make. Because they can see the past clearly, they tend to believe that they have a similar ability to tell the future as well. But as history suggests, the future (in stock markets) is most often not what is generally expected!

So, are you making this common but big investing mistake of hindsight? Share with us.

 Chart of the day
Today's chart shows India leading the global list on the amount of remittances sent by its citizens working abroad. In fact, India's US$ 55 bn along with China's US$ 51 bn account for a substantial 24% of the global remittance flows of US$ 440 bn during 2010 so far. One direct reason for India's high rank is the number of people who migrate out of the country each year. In 2010, the count stands at 11.4 m, second highest after Mexico's 11.9 m.

Data Source: World Bank

In commodities, a demand-supply swing of mere 5-10% is enough to bring about huge fluctuation in prices. Thus, one can imagine what will happen to prices when demand by one of the largest buyers goes up by as much as 500% and that too, in just a year. We are indeed referring to the huge jump in gold demand from none other than the dragon nation China.

As per Moneynews, China purchased more than 209 metric tonne of gold during first ten months of 2010, six times more than the same period last year! Little wonder, despite massive gold sale by the IMF, the price of gold has only scaled new peaks. And it may not be done yet. Devaluation of the US dollar and continued strong demand from buyers like China will ensure that the yellow metal keeps scaling new highs year after year.

However, gold is not the only precious metal that keeps creating new multi year highs. Silver too has joined in the fun. Last week, silver jumped nearly 10% and broke its thirty year old record! And just like gold, looks like even silver is far from done yet. Clearly, dollar's test as a reserve currency is getting severe by the day.

Well, commodity markets typically pay more attention to China. It is already one of the top importers of oil, copper and soybeans. And high prices for those commodities and others are heavily dependent on the country's blistering economic growth.

India's influence is on the supply end of the market as a major agricultural exporter. But of late, India is driving prices of two prized commodities. Sugar and cotton prices are surging as India restricts exports to make sure its own booming population has enough of both commodities. Demand for Indian cotton has soared in the past few months. This is mainly because the country is expecting a bumper crop, while two other key producers - China and Pakistan - have estimated losses of the fiber crops due to floods. Also, India is the world's top sugar consumer and its second-biggest producer, after Brazil. But unseasonably heavy rains in the country's main sugar-growing region caused a 10% drop in production in October and November, the first two months of the crop year.

While the government's move to cap exports of raw cotton yarn augurs well for domestic apparel manufacturers and exporters, the restriction on exports of sugar will help partially to bring down food inflation.

Despite criticism from all quarters on his monetary policies that are looking to destroy the value of the US dollar, the Fed chief Ben Bernanke has no regrets. On the contrary, in a recent television interview, he defended his decision to keep pumping cheap money into the system. In fact, he also cited the Fed's resolve to pump more of it whenever required.

Central bankers and economists the world over have been ruing over the prospects of asset bubbles in emerging markets. The risk of hyper-inflation thanks to the cheap money is more real to the developed world. However, the policy makers there do not seem to be seeing the light. At least not yet! Or is this another case of a misguided Fed chief trying to please his political bosses? A la Greenspan?

We in emerging markets have little to thank Bernanke for. But what must be irking the Americans is the fact that such faulty monetary policies are being pursued at the pretext of reducing unemployment. Clearly, Uncle Sam needs to have better policymakers in place.

What is the common thread that runs through Tata Steel, Dr. Reddy's and Suzlon? All three made big ticket overseas acquisitions a few years back that are still struggling to make money for them. M&A (mergers and acquisitions) activity then entered a period of lull when the global financial crisis intensified. Now the appetite for acquiring companies abroad seems to have increased again.

M&A deals accounted for around US$ 18 bn in 2009 and have doubled this year. But 2007 still takes the cake as total deals amounted to about US$ 44 bn. This year two companies that dominated the headlines for their overseas buys were Bharti Airtel and Reliance Industries.

Cheap liquidity has obviously fuelled the surge in M&As. But is the rationale for acquisition different this time? Have companies really analysed their takeover targets and ascertained that they are a perfect fit? Has the right price been paid? More importantly, will these acquisitions deliver over time? One will have to wait and watch.

Anyways, Indian markets had a strong day today. The BSE-Sensex was trading with gains of around 200 points (1%) at the time of writing this. These gains were largely led by buying in stocks from the metal and realty sectors. Among other key Asian markets, while Japan closed with losses of 0.1%, China and Hong Kong were up 0.5% and 0.7% respectively.

 Today's investing mantra
"Bull-markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria." - Sir John Templeton

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13 Responses to "Are you making this common investing mistake?"


Dec 7, 2010

It is the nature of market to go up and then down.It is the underlying intrinsic value of the share that is most important.Those who invest in long term basis need not mind such bouts of under performance.When I entered stock market,after my retirement from active service, I allocated certain amount for investment in shares and stocks.Whatever little knowledge I had gathered over a period years,with that I invested in a divr..esified portfolio.And to tell you the truth,had I not done anythind and kept silence I would have become crorepati from Lakhapati.I could have spent my time on reading good books, travelling and some charity work and social services.That would have given me mental peace and self satisfaction of doing something concrete work for society and my near and dear.Alas! It was not to happen! I started selling on little profits and big losses.The result was that whatever shares I sold for small profits grew into multibaggers over a period of time.One or two shares proved dud but others were turned into positive gains.If instead of frequently visiting the markets, had I concentrated on my bunch of stocks and replaced only non performing stocks my dream of doing all the above mentioned things would have fructified.The lesson I learnt is to stay with growing shares discarding daily ups and downs.Don't visit the market too frequently.



Dec 7, 2010

I dont know why but always i get the hunch of a overhaeated market but somehow im unable to sell at the right time.History repeats itself with me always.



Dec 7, 2010

Yes to some extent, I made this mistake. But I am trying to improve myself. Thanks do your daily dose of 5 Minutes Wrapup. It makes me smarter day by day.



Dec 7, 2010

Yes and still can't come out of the same unable to check the Greed as well as the Fear any remedy that you can suggest.



Dec 6, 2010

Yes, we have made the same mistake. Despite awareness that about every 7 years there is a major bull run follower by a major crash, we stayed heavily invested in 2007 and paid the price. The previous bull run was in 2000 followed by 70% crash in 2001!



Dec 6, 2010

Yes I have made the major mistakes in 2008 and 2009. Both the times by depending on the MF agent and Share broker respectively. Lesson learnt was don't depend on them anymore. In 2010 I managed my own portfolio and gained 35% on paper. Still not sure may sell the elephant, buy camels and then ultimately land up with donkeys.



Dec 6, 2010

i am a very young bigenner so please help win the bull & bear


Om Prakash Sharma

Dec 6, 2010

In jan 2008 also the analysts were continuously bombarding with one Indian Story being, but the sub-prime submerged every investor. So now we have started trading.As soon as You get some profit you take it home.Now also every one appearing on TV every one hour they change their opinion i.e. Buy on dips to sell on rise and the retail investor remain confused even today


V K Arora

Dec 6, 2010

The problem with most of the small investors is that during the bull run they start feeling that the market is getting over heated but tend to become greedy.They start incrasing the targeted price for selling everyday and in this process the day the markets start crashing , they do not get any chance to exit.The next chance may come after two to three years and in some cases it may never come.



Dec 6, 2010

this is not for 2008-2009 only i am facing the inefficiency daily. further i am very afraid to take any small risk. i myself telling that i am not fit for this kind of investment. my gains are coming from direct selling after some

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