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On This Day - 10 NOVEMBER 2011
Why does the market perform better than your portfolio?
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A big reason for this is the 'excesses'. This is excess fear as well as excess greed. Most investors tend to panic when things start getting tough and sell their holdings. As a result, they even end up selling those stocks that are actually just reacting to negative sentiments, but otherwise are sound investment opportunities. On the other side of the table, when the same investors see gains in a particular investment, they continue to hold it even though the fundamentals no longer justify the valuations. As a result, of this excessive greed they are hit hard when the stock comes crashing down. And unfortunately such declines wipe out all the gains that the investment would have otherwise made.
The second big problem that makes high returns elusive to a retail investor is the 'herd mentality'. Most investors follow the herd. If everyone is buying a stock, they would go ahead and buy and vice versa. Very few actually dig deeper to find out why is it that they are buying the stock. Are the fundamentals good? Are the numbers interesting? Is the management sound? Is it available cheap? What are the growth prospects? Hardly anyone sits down to ponder the answers to such questions before investing in the stocks. They just buy what everyone is buying. And like any herd, when there is a stampede, there is a bloodbath. And the investors suffer losses.
So how is it that investors could avoid falling in one or both of these traps? The answer is simple. It is important to look at investments like owners. This means that you do your due diligence and invest in those companies that are fundamentally strong and available at cheap valuations. And then hold on to these stocks for long horizon. And at the end of it you will not just end up earning the returns that the broader markets offer, but also end up beating them.
Besides leading to a loss of revenues for the Government, the Department of Telecommunication has argued that such deals are also creating non-level playing conditions and may hamper the future revenue potential from auction of 3G spectrum. The telecom companies however have a different story to tell. They are of the opinion that they've had a clear understanding with the Government that the 3G roaming deals would indeed be permitted. Thus, making any radical change right now would lead to their calculations going completely off the mark. The telecom players may have a point here. And we don't know whether any such understanding has been given in writing by the Government. If it hasn't been given, then this would certainly be another bolt from the blue for the already struggling telecom sector.
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