Once you are an investment professional you feel that everybody should be talking about investing all the time. That they should understand all the jargon and if they do not, they are dumb. Well, if you take a balanced view of life, it is pretty STUPID to talking about investing all your life and having no other interest! Here are a few myths..which we can break today:

1. Is a Rs. 15 share not much cheaper than a share costing Rs. 4500 or Rs. 50,000? 

Fair enough. In real life when you buy things you see a Rs. 10,000 fridge and a Rs. 40,000 fridge – and clearly the Rs. 10,000 fridge is the less expensive one. Why not apply that to shares or to the NAV of a mutual fund? That is what works in the mind of the investor – and he/she may not be wrong. Of course, you can buy more shares of a Rs. 15 share for the same amount of money invested, but that doesn’t mean it offers a better value than the Rs. 4500 share. Also when you buy you are actually investing – so you are not buying 1 share of Rs. 15 or 1 share of Rs. 4500. You invest in RUPEES. So if you have say Rs. 45000 to invest, you will buy 3000 shares of the Rs. 15 priced share and just 10 shares of the ones priced at Rs. 4500!   For example, the price of the share relative to the profits of the company should be considered.  If the Rs 4500 share trades at a price-to-earnings ratio of 10 times next year’s earnings, it could be considered cheaper than the Rs.15 share that trades at 15 times next year’s earnings!   When investing in a share, the question to ask is not how many shares my money can buy, but how much value my investment offers – as a business in the near and distant future.

2. Can I buy that share for 6 months and can I buy that bond for 20 years? 

I have no clue why but people have no issues in making long term investing in bonds, but think only in months while buying shares. I have friends who will buy an Infosys at 930 and get impatient when it reaches 1000 or when the investing is 4 months old. Why cannot you see in value terms? why cannot people invest in the long term vision? I guess if the people have nothing else to do, they see their portfolio and ‘book’ their profits. Once they are busy, they do not bother much. Perhaps it is because our media culture has convinced many that shares should be treated not as shares of companies to be owned but as money making short term game. All too many people think of them as short-term investments.  Whenever I’ve recommended a bond to a client, I’ve been met with skepticism if the stated maturity of the bond was generally greater than about five years. However in the IPO people did commit money in bonds for a period ALWAYS exceeding 10, or 15 years.  I guess people like to see ‘expiry dates’ in food items too!  I can say with confidence, however, that whenever I’ve recommended a share of a mutual fund not a single investor has asked how long he or she should consider owning it.  However once in a while I log in into their portfolios I see redemption – and what I get sheepish answers. sigh.

3. Debt reduction is a must, investment can wait.

Again a old hunter mind set I guess. If you have somebody else’s property – give it away. It does not make sense if your cost of funds is low and you have a nice regular source of income. What you should be seeing is that your NET WORTH – assets minus liabilities – has to be increasing in value on a regular basis. Exchanging your flexible asset (cash) for a fixed asset (house) makes very little sense – even in a retiree portfolio there could be some justification of existing debt. I have done many articles on this subject….so will not spend time on this please…