Your advisor must be your behavioural coach - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Your advisor must be your behavioural coach 

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In this issue:
» Twitter's bumper listing reminiscent of 1990s tech bubble
» What's wrong with the too-big-to-fail banks?
» Raghuram Rajan- Cautiously optimistic
» Why are HNIs looking for investment opportunities abroad?
» ...and more!

There seems to be a change of air in the Indian stock markets. Recently, the BSE-Sensex hit an all-time high. Foreign institutional investors (FIIs) are back with a bang. As per an article in Business Standard, FII ownership in the NSE Nifty companies increased to 18.12% during the September 2013 quarter. The same stood at 16.54% in the September 2012 quarter. In fact, India was the favourite emerging market destination in the month of October 2013.

Over the last few days, quite a few economic commentators have said that the worst is behind the Indian economy. Quite a few reports by brokerage houses and investment banks have started drawing an optimistic view of India against the likelihood of a change of leadership after the 2014 general elections.

As the markets heat up further, the inflow of more and more optimistic reports is quite likely to accelerate. During such liquidity-driven up-trends, financial brokers and advisors have hardly any incentive to warn investors about the inherent economic risks. So they bombard investors with rosy projections and lure them into risky trades. If history is any proof, small investors have always been the biggest losers in stock markets. And one of the biggest reasons for their failure is the misguidance by their financial advisors. Many such firms thrive at the cost of the investors' interest.

Such opportunistic behaviour which has become a commonplace in the financial sector brings to mind a question: Is it not possible for financial services firms to make money while also working in the interest of their clients? There are very few firms in the financial services space that show genuine concern for investors. One such firm that we really admire is Vanguard, the world's largest open ended mutual fund company. Vanguard was founded by renowned investor John Bogle who pioneered index funds. It is interesting to note that this gentleman shares many similarities with the legendary investor Warren Buffett. Like the Oracle of Omaha, Mr Bogle too has espoused the long term investment philosophy. He has often been very critical of the short term thinking of Wall Streeters.

Recently, Vanguard made some very important recommendations to advisors. Given the uncertain economic scenario, it has said that financial advisors must act as behavioural coaches for investors. They must help them filter away the market noise. Moreover, it is important that investors stay focussed on the long term and have a well-diversified investment portfolio.

We couldn't agree more. During such volatile and uncertain times, investors not only need financial guidance but also behavioural counsel. But investors must be very careful whose advice they take. One key question that they must ask is: Will your financial services provider benefit by guiding you with honest long term advice? Choosing the right advisor is as important as choosing the right investments.

Does your financial broker/ advisor care for your long term interests? Let us know your comments or post them on our Facebook page / Google+ page

01:30  Chart of the day
The Indian economy has been witnessing a severe economic slowdown with growth rates falling continuously over last several quarters. One of the worst hit areas is the manufacturing sector. Today's chart of the day shows the manufacturing Purchasing Managers' Index (PMI) for the BRIC economies over the last two months. It must be noted that PMI is an indicator of the economic health of the manufacturing sector. A reading above 50 indicates growth, whereas a reading below 50 indicates contraction. It is evident from the chart that while the other BRIC economies such as Russia, China and Brazil have moved into expansion phase in October, India's manufacturing sector continues to slump. The manufacturing sector in India is facing several structural constraints in the form of poor infrastructure, regulatory hurdles, slow reforms, red tape and corruption. Unless policy makers initiate some tough reforms, India's manufacturing sector may continue to slump.

Manufacturing woes persist in India

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Hype or reality? This is the question of the day and is related to the listing of social media website Twitter's stock. The stock has zoomed by 73% on its debut. The investors as well as the investment bankers have every reason to celebrate this. But the question is does the stock deserve the valuations? At the closing price of yesterday, the stock was trading at 22 times its 2014 revenue estimates. Before we get into the debate, here are a few facts. The company has not made money till date. It reported a loss of US$ 64.6 m in the quarter ended September 2013 as compared to a loss of US$ 21.6 m in the same period last year. The company depends on ad revenues for its living. This depends more on changing emotions in the market. So the revenue stream is not predictable. This brings us back to the question - are the valuations justified?

Even compared to its other social media peers, the valuations of Twitter are much higher. Therefore it can be inferred that perhaps the run up in the price of Twitter has more to do with emotions than with facts. And when this happens the chances of a price fall are higher. The thing is that in the long term, prices catch up with the underlying fundamentals. If fundamentals are strong, prices will and should increase. But if not then prices will crash. And when the future is as unpredictable as is the case with Twitter, it is difficult to say whether fundamentals will improve or not. Hence the question again - why pay so much for the stock then?

Any financial institution should abide by the law it is subject to. It should conduct business within the broad guidelines as outlined by the regulatory authorities. However, when the fear of regulation gets wiped away institutions indulge in unfair practices. Just a few days back we wrote how the European Union penalized a few banks for rigging the benchmark interest rate Euribor. Such flouting of laws in the financial industry is not prevalent in Europe alone. In fact, the head of the Federal Bank of New York, Mr Dudley, believes that lack of respect for the law is the primary reason why most banks in US have indulged in alleged wrong doings. Till now, UBS, RBS, Rabobank and Barclays have collectively agreed to pay US$ 4 bn as fines to government authorities for abusing their positions. Further, there are allegations that many have also indulged in manipulating currency markets.

In short, an organization which is the nerve centre of any financial system is willfully breaching laws. And what are the regulators doing? Levying fines! We fail to understand how levying fines can clean the system where the intention itself is to cheat. In fact, this is an easy way out. Flout the norms. Cheat. And then escape by paying a fine.

Why the regulators are being so soft towards institutions that have made a mockery of laws? The too-big-to-fail argument is unacceptable. In fact, it gives banks a leeway to operate in their own way knowing that they are above the system. It's high time that the regulators sniff the outcome of such a casual approach. If tough enforcements do not come into place another crisis could be in the making.

Playing safe and being cautious is the mantra of the high-profile Reserve Bank of India (RBI) Governor Dr Raghuram Rajan. Cognizant about the already weak economic growth, Mr Rajan is eyeing inflation closely. He has been focusing on providing monetary stimulus. And trying his best to fight out the 9.8% consumer price inflation with interest rate moves. Higher inflation can prove a matter of life and death for the rural folk in India unlike other developed nations. And Mr Rajan is sanguine about these facts. Besides these monetary policy measures, he has also been quick with banking sector reforms.

Emphasizing the need for transparency and clarity, he is keen to issue new banking licenses only to the befitting candidates. Besides, he has put new regulations pertaining to nationwide branch network for foreign banks in place. This has paved way for the smooth entry of foreign banks in Indian markets. And his decisions have been lauded by the industry experts as well. No wonder post Rajan taking the reins, both the financial and the foreign exchange markets has observed the light of the day. Ahead, the elections stand round the corner. But he continues to focus on the economic growth and the inflationary risks. And chooses to ignore the election calendar. We believe this cautious but rather optimistic approach of the head of the central bank will go a long way in putting back the Indian economy on surer footing.

India's growth story seems to be losing its appeal for rich investor class in India. As per the data by Association of Mutual Funds of India (AMFI), Indian equities are losing favour with the high net worth individuals (HNIs) . The high volatility in the Indian markets and weak economy has forced this affluent class to look for options abroad. As such, HNIs are looking at markets like the US, Japan and even Europe in quest for better returns and lower risks. As per the AMFI data, the number of folios held by HNIs under the offshore funds category is up 15 % in the six month period ending September 2013. This compares to the 11 % drop in folios in the period from October - March 2013.

This just underscores that the recent gains in the Indian stock markets are on a very shaky ground. The overall equity markets seem to be out of tune with the domestic economy. Instead the markets have become highly vulnerable to events like tapering of stimulus by US. High volatility in the stock markets and rupee has scared the seasoned class of investors. Still, we believe that even at these levels, there are enough stocks that have strong fundamentals and available at cheap valuations. As such, it will be well worth the effort to invest in such stocks with a long term horizon.

In the meanwhile Indian equity markets have extended their losses and are trading at day's low. At the time of writing, the benchmark BSE-Sensex was down by 187 points (-0.9%). All the stock indices were trading in the red. Banking and Consumer Durables stocks were the biggest losers. All the Asian stocks were trading weak led by China and Japan. The European markets also opened on a weak note.

04:50  Today's investing mantra
"Time is your friend; impulse is your enemy." - John Bogle
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1 Responses to "Your advisor must be your behavioural coach"


Nov 8, 2013

Good advise and worth reading.

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