Don't Get 'Sway'ed: There's a Better Way to Wealth - The 5 Minute WrapUp by Equitymaster
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Don't Get 'Sway'ed: There's a Better Way to Wealth

Feb 11, 2016

In this issue:
» What Does AMFI Data Say About Equity MF Investments?
» Is India Experiencing Inflation or Deflation?
» ...and more!
Rahul Shah, Co-Head of Research

Dear Readers,

Some of you may be familiar with Anisa Virji. She is the Managing Editor of Common Sense Living, and the Creating Wealth newsletter. She's passionate about helping people live a rich and fulfilling life.

For today's edition of the 5 Minute WrapUp, we invited Anisa to share her thoughts about wealth building. In this difficult economic climate, protecting our wealth becomes as important as growing it.

I believe her insights will be of great help to our readers, many of whom may have become fearful due to the recent market decline.

So here's Anisa with her prescription for a 'better way' of attaining wealth.

Happy reading!
Rahul Shah


'1,000', called out the auctioneer.

Everyone was a little surprised. The starting bid at these college charity auctions is usually a few hundred rupees at most. We looked at the object on display once again... A painting of two kittens playing with a ball of wool. What was so special about it? It was certainly cute. We looked at the girl who had called out the bid, wondering what she knew that we didn't.

Before anyone could figure it out a second bid was called out. And a third. Soon the price was rising rapidly and the cute kittens fetched the highest price of all the auction items that day.

The 'what is everyone else doing' method

We use this method to help us make decisions in cases where we don't have firsthand knowledge.

Sometimes this tendency is helpful.

If you see the crowds running out of a building, it's safer to assume the building is burning and run with the crowd, than try to go get firsthand knowledge.

But more often than not, this behaviour can cost you.

I found myself standing next to the girl who had made the thousand rupee starting bid on the kittens later that night, and asked her what she liked so much about that painting.

'Oh, no, I've never seen that painting before. I came to the event thinking I would give away Rs 1,000 to the charity. So I just bid on the first thing I saw.'


Are we doomed to be irrational?

Have you ever walked past someone looking up at the sky? Have you ever noticed how strong the urge to crane your neck and see what they're looking at is?

Often, when the herds are running in one direction it is totally natural to follow them. Even when you don't want to, you find your feet turning irrationally in the direction of the crowds.

That's because we are 'swayed' by our own psychological makeup to make an irrational decision, as noted in the Brafman brothers book, Sway: The Irresistible Pull of Irrational Behaviour.

In their book, the brothers caution us that we attribute value to things, not based on objective data, but because it is perceived as having value.

'Value attribution' caused the ordinary kittens to fetch a high price at auction.

It also causes you to panic and sell a falling stock, because the fact that everyone else is selling reduces the perceived value of the stock. If you were being rational, you would remind yourself that the reason you bought that stock in the first place because you believed the business you bought into has solid fundamentals.

If you could be rational, you would remind yourself that Warren Buffett says that, when others are being fearful and unloading stocks, you should do the opposite.

So how do you overcome the powerful sway of your irrational tendencies?

Be wary of group-think

You're reading the 5 Minute Wrapup, so you're already way ahead on this.

One of their core principles is to question conventional wisdom.

Making a decision just because everyone else is making the same decision - and not because of objective data - is not rational.

And it can hurt you, in particular in business and investing.

You can learn a great deal from people who have followed this philosophy to come from nothing to achieve great things in life. Mark Ford is a great example.

There's a better way

When it comes to investing, the herd is almost always WRONG or TOO LATE.

To be a successful investor, you must be able to rationally decide when to buy and when to sell. And WHAT to buy and sell.

I know that sounds odd...and complicated. But in his newsletter, Creating Wealth, Mark will show you how to do this. You'll learn:

  • The three-legged safety stool - that can protect your whole portfolio from devastating losses if there's another 2008-style crash.
  • A three-step retirement plan for the not-yet wealthy - Mark: 'This strategy has three parts. I designed it specifically for people who are in financial trouble. That means anyone with less than Rs 3,000,000 in liquid assets (cash and stocks), little or no equity in their homes and only pension to count on after they stop working. These are three things you should do right now...;
  • What you need to know about the 'lots-of-singles-and-doubles' approach. Many stock newsletters promote the illusion that you can, and should, be trying to hit a 1,000% boundary with every investment you make. Mark reveals a different approach. One that can accumulate multiple 15% gains consistently over time...
  • The five most ruinous wealth traps that are throwing off investors as you read this...
  • What the 'Enlightened Rich' know about gold that ordinary investors - and even many gold lovers - don't...

Mark Ford's ideas are different from anything you have ever read. He will help you see where the herds are rampaging...and how you can turn around and carve your own path. He shows you how the really wealthy became that way...and how the paths they took were different from the rest...

But don't take my word for can find out for yourself. For a limited time, we are giving Mark's latest and in my opinion, best book, Living Rich. With the book you can also get a 30-day free trial of his Creating Wealth newsletter. Request your free book by clicking here.

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2:45 Chart of the Day

As we are on the topic of wealth building, today's chart shows just how the aam investor is hurting himself. Investments in equity mutual funds is a good way to build wealth in the long-term. However, this approach requires patience. Clearly, that is missing when it comes to equity mutual fund investors.

During falling markets, investors should ideally increase their exposure to equities. Unfortunately, the opposite seems to be happening. As the markets have drifted lower in FY16, the declining trend of inflows into equity MFs is obvious. In the data, we left out the tax saving ELSS, balanced, and fund of funds categories.

This trend does not bode well for retail investors. Instead of becoming greedy when the markets are fearful, they seem to be following the crowd. We believe, this type of behavior will always result in poor returns.

Equity Inflows Slow Down as Market Falls


We at Equitymaster are not experts at macro forecasting. We prefer the bottom-up approach to investing. However, that does not mean we ignore macro data. We pay close attention to it. We keep track of important economic and industrial data. Unfortunately, the quality of economic data is not satisfactory in our opinion.

Take inflation for example. The divergence between the WPI and the CPI is well documented. But the problem doesn't stop there. As per an article in Livemint, the Central Statistics Office (CSO), believes the Indian economy is experiencing deflation. This is because the inflation rate as measured by the Gross Value Added Deflator (GVA Deflator) is negative. This is in stark contrast to the consumer price index which came in at 5.61% for December 2015.

So which measure is correct? Is India experiencing inflation or deflation? Your guess is as good as ours. It appears that unless the quality of data collection improves, the state of confusion will endure.


After opening the day in the red, the Indian stock markets slipped further into negative territory in the afternoon. At the time of writing, the BSE-Sensex was trading lower by about 280 points (down 1.2%), while the NSE Nifty was trading lower by 88 points (down 1.2%). Most sectoral indices were trading weak with stocks from the FMCG and energy sectors leading the losses.

4.50 Today's investing Mantra

"We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful." - Warren Buffett

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

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