Are you the world's worst investor? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Are you the world's worst investor? 

A  A  A
In this issue:
» Mark Mobius: EM ruckus is not permanent
» Neither a hawk, nor a dove, RBI is an owl!
» Gold import duty cut on radar
» Tata Group's brand value increases in the last 4 years
» ...and more!

Overconfidence bias and herd mentality are the biggest enemies of any investor. Overconfidence bias is a feeling that you know more than you actually do. Herd mentality simply means buying something just because majority of them have bought. Both these drawbacks are common to most naive retail investors.

In fact, herd mentality increases your overconfidence bias. Imagine you bought something by chasing a latest fad and it went up. Think buying any FMCG stock in the current environment where defensives are outperforming cyclicals. If the stock does well, an investor may gain confidence in his stock picking ability. But effectively here he has fallen prey to a greater fool theory.

Ignoring valuations and buying something in the hope that asset value will increase in future and you will be able to sell it to another person (read fool) is the essence of greater fool theory. Chasing fads and buying on advice which is fraught with conflict of interest is the biggest investing mistake investors could ever make.

Buying dividend yield companies is another area where investors commit folly. Since dividends have sentimental value, investors become an easy prey to management gimmickry of depicting themselves as shareholder friendly.

Most investors are unaware that stock markets are fraught with dividend bait companies. Such companies lure investors by paying high dividend for a couple of years even if their financial condition is poor. Think of a company paying dividend by raising debt. Buying companies simply on the basis of dividend yield is a recipe for disaster. Investors should assess the long term dividend paying history. Consistency in payments and the source of funding should also be seen.

Apart from being lured into dividend trap, following trend is another concern for naive investors. Rewind back to 2010. Most infrastructure stocks were hot picks then. Infra story was sold in every nook and corner of Dalal Street. That's because India had grossly under-invested in infrastructure. However, we know the performance of infra stocks since then. Anyone who bought then chasing the infra trend is sitting on huge losses now. This is another example of trend analysis going wrong.

Buying on dips and increasing exposure to stocks without paying heed to fundamentals is another mistake which most investors make. It's called averaging. This happens when there is no proper asset allocation and financial planning in place.

To sum up buying on patterns, chasing fads, timing the market and investing on hot tips are common mistakes investors commit. One should have the nerve to ignore such external noise. Following the basics like focusing on management quality, fundamentals and financials is the key. Also, one should be more stock specific and stick to his/her circle of competence. Another strategy is to approach a financial adviser if you are unable to take your investment decisions.

What are the worst investing mistakes you have made till today? Let us know your comments or share your views in the Equitymaster Club.

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01:50  Chart of the day
In this highly competitive age and globalization, visibility matters. Over time, the companies world over are focusing on branding and marketing rather than just on products or services. And the new one to join the bandwagon is 236 year old Tata Group. As per an article in Livemint, Tata Group will be launching new global communication campaign. This is first such effort by the group. While Tata Group hardly needs an introduction in India, the company is now focusing on global presence. After all, its global operations add more than 60% to the topline. And this is one of the messages that the group wants to send across. The other agenda is to establish the brand globally for virtues such as trust and transparency and group's corporate social responsibility. In 2013, the group's brand value has been estimated at US$ 18.2 bn by Brand Finance Plc. Since 2010, the brand value has gone up by 62%. Further, it has scaled up in the ranking order, from 65 in 2010 to 39 in 2013.

Now that the Indian economy is facing a tough time, it is time that the group focuses on making the most of its globally diversified presence. We believe that the move is well timed. Further, now that the group is expanding footprints globally and working with people belonging to different cultures, a uniform communication structure is crucial.

Brand value of Tata Group

Emerging markets currencies are falling like nine pins. Asset markets too are plummeting. And it's hard not to get nervous and jittery about these turn of events. However, if emerging market guru Mark Mobius is to be believed, this turmoil is only likely to be temporary. Talking to CNBC, Mobius opined that there is a general statement that one can make about the recent chaos. And it is that emerging markets that have run up huge deficits on the balance of payments front are the ones that are suffering the most. Simply because investors that bought assets in these markets are pulling out the money in view of the US Fed taper.

However, as per Mobius, tapering is quite different from tightening. And therefore as far as he can tell, the balance sheets of central banks around the world are still enormous and its unlikely that there will be any liquidity issues. Consequently, investors who are pulling out of emerging markets are likely to feel sorry about it later.

Although Mobius' assessment is indeed correct, we don't quite support the view that one should invest based solely on what central banks around the world are doing. It makes sense to look at the long term fundamentals of the country that one is investing in and also those of the underlying asset.

A hawk or a dove? These birds are often considered symbolic of the Indian central bank's stance on risk management and monetary policies. Well, given a choice, the Reserve Bank of India (RBI) would like to associate itself with a bird that is intellectually more competent. Governor Dr Raghuram Rajan, in his post monetary policy speech yesterday reasoned why the RBI is more like an owl. The fascination for birds notwithstanding, the RBI has been known to keep vigil on India's inflation problem. However, its status quo in the last policy review raised some questions. Whether the governor will toe in line with the Finance Minister's rate cut diktat was the top concern. However, Dr Rajan has sidelined such concerns and assured that consumers' interest is on top of his mind. Hence, rather than heeding to investor demands and stoking market sentiments, he would rather protect consumers from steep inflation. A control on inflation will automatically boost growth in the medium to long term.

It is always interesting what Marc Faber, author of the Boom, Gloom and Doom report has to say about the investing world. As reported in an article on, Faber is bullish on gold and does not favour US stocks. One of the primary reasons for this is no doubt the loose monetary policies of the Fed. This has debased the value of paper currencies. Hence, he favours owning physical assets like gold given his view that paper assets are doomed. That is not all. Faber is not positive on US stocks. Right now, stock markets have reported gains largely on account of liquidity. But once this liquidity tap is turned off, stock prices are bound to fall. Faber is also of the view that as long as interest rates are kept near zero, investing in US Treasuries makes sense. Especially because the yields will drop and this will drive up prices. We agree with Faber on stocks given that the current rally has been in stark contrast to the economic fundamentals which have been weak. Thus, while gold may have seriously underperformed in the past year, it is still an asset class that should form part of an investor's portfolio.

Just last year, the Finance Minister had gone on an all-out war on gold imports. The gold import duty had been increased to 10%. As per an article in DNA, the FM is now considering a 2% duty cut. This would mean a relief of about Rs 60 to 80 per gram of gold. Recently, the government also increased the number of subsidies LPG cylinders to 12. Why is the government considering these measures? Do they have a rational basis or are these decisions politically motivated? It's no big deal to recognize that it is the latter. When vested political agenda dominates economic policies, the interests of the nation are often compromised. This has been the story of India all along. And now with the general elections just a few months away, the government's moves are reeking of attempts to please the electorate.

In the meanwhile, Indian stock markets are trading firm. At the time of writing, the benchmark BSE Sensex was up by 61 points (0.3%). Pharma and Capital Goods stocks were the biggest gainers. Most of the Asian stock markets were trading higher led by Hong Kong and Japan. The European markets opened on a positive note.

04:50  Today's investing mantra
"Losing some money is an inevitable part of investing and there is nothing you can do to prevent it" - Warren Buffett
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2 Responses to "Are you the world's worst investor?"

Swapnil Gangele

Jan 30, 2014

Its the time of 2k7 when as Warren Buffet says even a rikshaw driver asks you about share price of a company I started investing in one of the renowned trader preferred stock of time looking its rise from 32 to 145 and imagining this rise is just waiting me to take another ride and as written above the unfortunate coincidence it moved northward till 252 really not to give me any profit but to take the last stick to be burned in the minutes lasting camp fire.


s, nair

Jan 30, 2014

Tempted to follow the crowd and following the advise of person who do not risk of investing.

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