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Investing: Lessons that matter

Jan 2, 2009

A lesson is learnt once one experiences a problem. 2008 was a year where we experienced a variety of problems, thus, learning a variety of lessons. While lessons may be easy to understand, it is even easier to forget them, especially when blinded by good times. However, once the bad times come, they smack you right in the face.Speculation and greed are bad
Greed is considered to be the mother of all sins. It is a sin of excess. An excessive desire to acquire more than one deserves or needs. Many are attracted to the lure of making money. When markets were flying high at the beginning of the year, stocks were very much overvalued. Many investors now repent not following the basic rules of investing - 'Buy when low, sell when high'.

It even pushes them to do things they don't understand. Take speculating in F&Os for example. But the possibility of the money that can be made, along with experiencing someone else making a fast buck in the same (out of pure luck) is convincing enough for most people to try their own hand at it. The crux of the matter here is that people can become willing to put in their own money into something that they don't fully understand, just by getting influenced with what people around them are doing.

Stocks become overvalued
Stocks may get overvalued from time to time. Isn't that stating the obvious? 2008 taught us that it is not. Around the last bubble, the tech-boom, Warren Buffett had said, "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." 2008 was the year the pin met the bubble in one asset class after the other.

IPOs are 'imaginary profits only'
'Subscribe and selloff on listing day' is what many people believe in, expecting stocks to double on the listing day. After the much created IPO hype in 2007, the early part of 2008 probably witnessed the most over hyped IPO of all time. We all know what the result of the same was.

As Benjamin Graham writes in his 'The Intelligent Investor', "In every case, investors have burned themselves on IPOs, have stayed away for at least two years, but have always returned for another scalding. For as long as stock markets have existed, investors have gone through this manic-depressive cycle."

Weighing the evidences objectively, intelligent investors should conclude that IPO does not stand only for 'initial public offering'. More accurately, it is also a shorthand for - It's Probably Overpriced, or Imaginary Profits Only, or even Insiders' Private Opportunity.

Management is key
While picking stocks, how much weight age you give to the management of the company? If you don't give any weight age to management then think again. It was always a well known fact that management quality was one of the most important requisites to look into while investing in companies and their stocks. But somewhere along the way this was forgotten. The importance of management quality has now made its presence felt.

The recent management goof up at Satyam is an eye opener for all the investors. Satyam is a leading software company and its financials are strong. The company has been able to grow its revenue at a CAGR of more than 30% in last three years. But instead of looking at only its numbers and standing, investors should have looked at its management quality and composition as well. After all, a leader is a person who keeps people's interest first (in this case, investors). A leader who is blind in relationship is not a good leader.

Investor activism works
When it comes to corporate actions and decisions on the same, non-promoter investors have not been know for raising their voices in India. But not anymore! The way Satyam's management has been criticized in recent times is a proof.

Investor activism has been seen as a way to lessen managerial or boardroom complacency. However, history is a living proof that such activism works wonders in improving corporate performances over the long term.

The problem with whistle-blower policies in India is that those with the whistles do not blow them often. And when some of them blow, they do not blow it hard enough. This needs to change if the bridge between minority and promoter shareholders has to strengthen.

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