Don't Invest Like This Fish!
(Sep 14, 2015)
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In this issue:
» Is this the worst monsoon season ever?
» How will the RBI react to demands for rate cuts?
» ...and more!
2007-The Indian stock markets were in a dream bull rally. A friend who was in the diamond business had been alien to stocks until then. But peer pressure and the chance of making a quick buck lured him to the markets. Just a few months after invested, the market crash of 2008 happened. In a bid to salvage his portfolio, he kept investing more money throughout the crash. But the markets tanked even lower in 2009. All his investments were down significantly. Hopelessness and despair gripped him. He couldn't take it any longer. He sold off his entire portfolio at a huge loss. And while the financial hit was significant, the psychological dent was way deeper. He simply never returned to the markets again.
I once attended a seminar on emotional intelligence. The speaker related an interesting experiment that probably explains my friend's behaviour.
The experiment involved a fish in a water tank. The experimenter dropped some fish food in the tank. The fish devoured it immediately. Thereafter, the experimenter introduced another element in the fish tank. When he dropped food the second time, he also inserted a glass sheet between the fish and its food. So, the moment the fish dashed towards the food, it hit the glass sheet and retreated. This went on several times. Every time the fish would swim towards the food, it would bump against the glass sheet. After several failed attempts and some bruises, the fish finally retreated in one corner of the tank.
When the glass sheet was finally lifted, guess what happened? The fish would simply not go towards the food. Surprising, isn't it? While the actual glass sheet had been removed, it still existed in the memory of the fish.
I was quite impressed with the insights that this story offered for human behavior, particularly in the context of investing. The fish stopped moving towards the food, just the way my friend had quit investing in stocks.
Well, not many investors would quit investing altogether after some bad experiences. But failures do leave behind some residual psychological impacts that may create a glass wall between them and wealth creation. The key is to be able to handle setbacks without letting them overshadow and jeopardize your investing behaviour and decision making.
As an investor, how do you deal with setbacks and failures? Do you feel that your past experiences weigh negatively on your present investing style? Let us know your comments or share your views in the Equitymaster Club.
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The impact of monsoons on the earnings of India Inc cannot be undermined. How has the 2015 monsoon season played out? Well, it began with a bang. Indeed, rainfall was quite healthy in the month of June raising hopes that it would continue. Alas, that was not to be. We are already into mid September and India is staring at a possible 16% rainfall deficit. July and August have been pretty disappointing with not much recovery this month either.
Thus, as reported in The Economic Times, the 2015 monsoon season could very well be labeled as among the worst 3 in the last 30 years. The other two years where the rainfall deficit was quite severe were 2009 (21.8%) and 2002 (19.2%).
Not surprisingly, this has been taking a toll on rural demand and rural growth. Since crop output is lower, rural incomes are bound to get impacted. As reported in the Mint, nominal rural wage growth has decelerated to 4.6% for the 12 months ending June 2015, compared with 12.5% in the year-ago period. Thus, the rural consumption story does face headwinds in the near term. And therefore, companies that have a rural focused business model are bearing the brunt in terms of tepid growth.
Is this the worst monsoon season ever?
Interestingly enough, although monsoons have been tepid so far, they have not wreaked havoc on food prices. In fact, food inflation seems to be under control. What more, overall inflation figures have come down significantly. Not surprisingly, voices clamouring for a cut in interest rates have increased. Especially since India's economic growth has yet to gain traction.
As reported in the Mint, annual consumer price inflation, which the central bank tracks to set rates, eased to 3.6% in August due to lower fuel prices, from a record low of 3.78% in July. Wholesale prices have also fallen for a tenth straight month. A large part of this has been attributed to lower fuel prices given that oil prices globally have plunged.
Now, the RBI has already cut rates thrice this year. So it will be interesting to see what it announces in its policy review on September 29. Dr Raghuram Rajan continues to be a worried man. True, inflation has come down. But pressures have not entirely gone away. First, oil prices typically tend to be volatile. Second, we cannot say for sure whether there will be a huge impact from the poor monsoon in 2015. Will this fuel food inflation in the coming months? Truly a tough call for the RBI governor to make.
Indian stock markets began today's trading session on a volatile note. However, in the subsequent hours, sustained buying activity across index heavyweights ensured that the indices traded above the dotted line. At the time of writing, the BSE-Sensex was trading up by around 186 points. Gains were largely seen in metals and banking stocks.
"A pin lies in wait for every bubble. And when the two eventually meet, a new wave of investors learns some very old lessons: First, many in Wall Street - a community in which quality control is not prized - will sell investors anything they will buy. Second, speculation is most dangerous when it looks easiest." - Warren Buffett
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