Investment thinking: New frontiers
When it comes to investing- are you conservative or liberal or brave?
Oops did i introduce a new word in your investment dictionary?
We have been led to believe that if you are a conservative investor we should invest more in bonds and less in equities. Right? Well, for a Rakesh Jhunjhunwala who understands equity, is equity really risky?
What about a 78 year old investor with a Rs. 5 crore net-worth and spending about Rs. 5L a year? Will it really matter whether he is in equity assets or just keeping all the money in a savings account? Both are right strategies – depending on the desired end result.
Conservatism is some kind of “refusing to learn”. So a doctor who attends my workshop, sees excel calculators against real estate CONTINUES to invest in RE. No, he knows it makes no sense, but he justifies that by saying “Investing in other avenues is over-whelming”. He is just playing “safe” – knows that he will work till 78, and hopefully die at 82! Actually he is NOT investing for returns, he is investing just to keep himself busy. RETURNS DON’T MATTER TO HIM AT ALL. Trying to give him financial advise is USELESS. He does not need it, nor does not want it.
It is reflected in all our portfolios. Even if you showed me the advantages of investing in gold, debt, real estate it is unlikely that I will commit serious money to those assets. We all suffer from Home bias – why should we invest abroad when India is the fastest growing economy? Why invest in asset classes that we are unfamiliar with?
I suggest the following things to overcome fear of unknown things….
- Take up a new musical instrument and start learning.
- Reduce the number of ‘gut’ based decisions – take a reasoned view of what you do.
- If you are an IFA, go to another IFA and get your portfolio reviewed – the bias will be visible to him better!
- If you are an investor, spot a contra fund and do a SIP in that..
- Invest in an asset class that you have avoided so far…
- Buy unfamiliar shares in an unfamiliar industry – if the numbers makes sense…buying Hul is easy. Buying Dynamatic Technologies is difficulties..
- “Familiar” may mean safe, but hey you were looking for “growth” – what happened?
- Make sure that you have a solid foundation – say Rs. 5 million in good debt instruments as the base.
- Keep reading adventure books – real and novel
- Be ready for the worst.
- Beyond a point remember you are just the trustee – but a trustee who has to achieve real growth – not just nominal preservation.
- Remember too much money is lost to interrupting the compounding. Don’t interrupt.
SS
Hi Subra sir, We invest for long term. But does a political event like civil unrest, anger and outrage which can result in war-like conditions have an adverse impact on investor confidence and therefore the markets. Will it spook them? As we know, Govt is under tremendous pressure to draw blood and most probably will..
Santy
SS,
Let me ask a few questions… Is it the first time we had a conflict with Pak? How many times have had similar situations with Pak in the last 40 years (since the inception of sensex)? what has been the impact on growth? If you are investing for 10+ years, does it matter if there is going to tension for the next 3 or 6 months? Show me anywhere in history where this no economic issues, civil or political issues for a period of 10 years.
SS
Hi Santy, Thank you for response. We had conflict with Pak many times. But since inception of Sensex in 1979, we had only a Kargil war. (not major ones like 1962, 1965 and 1971).
The issue which concerns us (investors) now, is availability of information and ease of online related trading/investment. It has made it easy for participants to get spooked (2008 Mumbai attack) and pull out the money with zero notice. Especially FII will not wait and watch..
Over 10 years it is always good.. But suppose you have Rs 100 now. Do you want it to go to Rs 50 and then become 4 times to Rs 200.. OR you want Rs 100 to go 4 times to Rs 400 ? Can we ignore the geo-political scenario ? What I am trying to assess is just the ‘short-term’ risk to apportion & re-balance the cash:equity ratio.
The people are furious and demanding revenge (like war). People do not realize, prices of Petrol and other imports will shoot up, transportation of goods vehicles will take a hit. Sales will get hit.. That has adverse impact on earnings and therefore the businesses.
SS
Here is WB: “We will continue to ignore political and economic forecasts which are an expensive distraction for many investors and businessmen. Thirty years ago, no one could have foreseen the huge expansion of the Vietnam War, wage and price controls, two oil shocks, the resignation of a president, the dissolution of the Soviet Union, a one-day drop in the Dow of 508 points, or treasury bill yields fluctuating between 2.8% and 17.4%. But surprise-none of these blockbuster events made even the slightest dent in Ben Graham’s investment principles.”
But by the way, WB is in US. We are in India. Indian politicians are different from US politicians. So is their consumption pattern, economy size, power of Dollar, people’s capitalist attitude, world view about US, as compared to India’s interest rates, corruption, black money, crime rate and in general overall economic/ political/ military strength. I do believe in India story. But taking WB advise blindly in this particular Indian context (only) is like driving on Indian streets looking for/ depending on US signboards.
Santy
So, in your opinion, the bombay stock exchange bombing in early 90s, Parliament attack in early 2000s, Mumbai attack in late 2000s are not significant. Keep following the news and you will feel jingoistic. Things have always happened and will still happen.If you equate every nonsense to geo political scenarios. Did you know before Kargil war that it will happen? Did you predict the Syria crisis or Greek debt default? We can keep second guessing things or just do what is in our control – invest as per your asset allocation and risk aptitude.
Santy
Looks like you started investing in the last 5 years. So everything will appear a risk. None of the incidents I mentioned was in US context but happened in India. The Winter is coming but it may not be due to our neighbors. After 1 week of the attack, the news channels have been moved on. Govt will do what it has to. Market will do its own stuff. If we are able to second guess the market, we would be millionaires now.
SS
Hi Santy, I respect your thoughts. It is very mature and thought provoking. I agree with you.