How Making Money Can Lead to Losing Money - The 5 Minute WrapUp by Equitymaster
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How Making Money Can Lead to Losing Money

Feb 4, 2016

In this issue:
» A fifth of all IPOs last year private equity backed
» Bill Gross points to confused thinking among central bankers
» ...and more!
Rahul Shah, Co-Head of Research

Do you like compliments?

Sure you do. Everyone one likes to be complimented...about how they look, about something they own, or perhaps something they've done.

But what if you realise the praise someone gave you wasn't true...that he or she didn't really mean it, but said it to make you happy...or to gain your goodwill?

When praise is insincere, no one likes it. The dictionary calls it 'flattery'. Most of us are guilty of it from time to time. But some people are so darn smooth at it that you barely realise their insincerity.

The greatest flatterer of them all

You might not have noticed, but the most notorious flatterer of them all is right here with us. We deal with him every day. He plays with our emotions every day.

His name, off course, is Mr Market.

The stock market is a deceitful being. It can deliver rich rewards to silly investors. You could be a monkey throwing darts to pick stocks, and it could give you some fabulous returns. The market loves to feed your vanity and make you believe that you made money because you have cracked the code of stock investing...and that all the world's riches are now yours for the taking.

The market can pay compliments where none are deserved.

And that's when making money can lead you to lose money. Investors see their 100 rupees turn into 200. The vain compliments the market pays often lead investors to arrive at a distorted and inflated sense of their investing abilities. They get bold, sometimes just when they should be becoming more cautious. They double up their bets just when they should be taking money off the table.

At that precise moment, the market does not hesitate to pull the rug from under their feet. The Rs 200 turns to Rs 20 in a blink.

The trick to not letting the market fool you

Don't get obsessed with the results you achieve, especially over the short term. Understand the market is quite capable of showing you great short-term results even if you've made silly investment decisions. The reverse is also true. Even if you've made intelligent decisions, your results can still look bad in the short term. Stocks can go lower after you buy them. The market can tease you, even if you have made all the right moves.

The trick is to not use short-term stock market outcomes to judge the quality of your decisions.

Be obsessed, instead, with the process. Ensure that the intellectual framework you use to make investing decisions is rational and based on the wisdom of successful investors. Ensure that it has stood the test of your critical thinking. That you have applied your own mind to decide if it makes sense or not.

Focus on this, and only this. The rest will fall in place.

The market will play with your emotions, but its deceptions are short-lived. Over the longer term, only if your investing process is sound will you make money - and keep it too.

Do you think this is a good strategy to make sustainable wealth in the stock market? Let us know your comments or share your views in the Equitymaster Club.

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2.35 Chart of the day

Back in 2011, we had highlighted how 80% of IPOs that came out the year before and were backed by private equity (PE) funds were trading way below their offer prices. While IPOs do tend to trade below their offer prices, 80% was a pretty high number even by those standards.

The reason we are mentioning this is because the very same specter may come back to haunt retail investors this year or the next. As today's chart of the day highlights, close to a fifth of all money raised through IPOs last year was raised by PE backed firms and there's every possibility that 2016 may see an even bigger contribution.

It won't be an understatement to say that most PE firms look to exit at the highest price possible so as to make killer gains in the process. And it is the poor retail investor who then ends up getting stuck with stocks bought at very high prices.

This brings us back to the main issue of valuations. It is the most important thing to look at while investing in a company. Even if the company is fundamentally sound, has an excellent track record, fantastic growth prospects and an honest management, still it has to be available at cheap valuations to invest in. Unless the valuations are compelling, one should stay away from the best of stocks. Only then can one maximize his return on investment.

IPOs backed by Private Equity (PE) funds on the rise....


While bond guru Bill Gross may have switched jobs, what hasn't changed is his habit of publishing a monthly letter where he shares his investment outlook. So, what does his latest letter say? Well, Gross is of the view that central bankers are increasingly addled and distorted as their low and negative-interest rate policies have failed to produce sustainable growth. And there are clear signs as per him that even the US Federal Reserve seems uncertain of the next steps.

He rightly points out that the central banks seem to be seeing everything through a prism of interest rates. If the economy is hot, they raise rates to cool if off and if it goes cold, they try to light a fire under it by lowering interest rates. In the aftermath of 2008, these policies were pushed to never before seen levels and are now being taken even into the negative territory. But has this worked? Certainly not. Not only is growth absent but there are signs of distress across a lot of economies. Therefore, while Gross isn't necessarily sure what this will lead to, we agree with him that the risks have certainly increased. It therefore pays to be in safe assets like high quality bonds and stocks and reduce exposure to speculative, high risk bets.


Meanwhile, Indian stock markets traded strong today with the BSE-Sensex higher by more than 270 points at the time of writing. Metals and engineering stocks were amongst the highest gainers. BSE Mid and Small Cap indices were also seen trading significantly in the positive.

4:56 Todays Investment mantra

"The most realistic distinction between the investor and the speculator is found in their attitude toward stock-market movements. The speculator's primary interest lies in anticipating and profiting from market fluctuations. The investor's primary interest lies in acquiring and holding suitable securities at suitable prices." - Benjamin Graham

This edition of The 5 Minute WrapUp is authored by Rahul Shah (Research Analyst).

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1 Responses to "How Making Money Can Lead to Losing Money"


Feb 4, 2016


This single article is enough to become your permanent fan. Looks flattery :) but that's intended.

Jokes apart, I genuinely liked your thinking... develop a sound process oneself, believe the process, fine tune it and improve it.

Words of a sage!


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