Investment Fallacies: Stay On Guard

“The four most dangerous words in investing are ‘This Time It’s Different’.”
                                                                –         Sir John Templeton

CNBC-TV18's research analyst, Haresh Soneji

The column is essentially a tribute to Sir John Templeton, the legendary investor who passed away July 8, 2008. He left behind a lifetime of investing wisdom. While writing this column, I essentially bring to life the mistakes often committed by small retail investors and combine it with the blunders I committed when I started investing into the equity market. 18 years thence, with mistakes a plenty, and still a lot to learn, I could safely mention the vital inputs I learnt from this legendary investor’s investment styles. And when I travelled across India, at various small retail investor forums, I could hear, understand, reflect and analyse the mistakes committed by such investors. The slip-ups were essentially the same. And every time, the small retail investors uttered the famous four words, which Sir John Templeton terms as dangerous – This Time It’s Different. Clearly, every time the small retail investors burned their fingers. Scams, trading and speculating, plain ignorance – it all essentially resulted in eroding their hard earned wealth.

Hereunder is an attempt to help small retail investors with loads of guidance from Sir John Templeton.

Investing Is A Full Time Profession

Almost all small retail investors make this mistake. I have. You have. Our friends, colleagues and neighbours have. In brief, everybody who is not a financial professional has committed this blunder. In fact, there are a few studies that even show that at times even professionals could go wrong. The crux of the matter however is that investing is a full time profession. It needs a lot of education, a lot of analysis, a lot of dedication and time. Ask yourself – can you read and understand balance sheets, do you have access to management, do you have enough time to diligently follow companies that are in your portfolio? More often than not, the answers to these questions are in the negative. The investment industry is opaque because nobody can see the future clearly. If you think you know all the answers, you probably haven’t even understood all the questions. Therefore, your definitely not being wise doing it all yourself. Stick to professionals with mutual funds. They charge you some 2%. Some even lower. These days there is no entry load on your investments if you skip the agent and deposit directly into equity mutual funds.

Invest, Don’t Speculate

Are you an investor or a trader/speculator? You must answer this question yourself. A trader may be completely right or completely wrong. Its momentary and the risks are very high. But, investment is gradual. Investment is a life time opportunity. You invest your investible surplus and sell it only to fund something important – buying a home, your child’s education, getting your children married, among others. So, you don’t dig into your investment every now and then. You keep nurturing it for the lifetime. Like the Sage of Omaha says, “Our ideal holding period is forever.”

Market Direction

If you’re an investor, don’t worry about the market direction. Sir John Templeton once summed it beautifully in an interview in 1978, “I never ask if the market is going to go up or down because I don't know, and besides it doesn't matter… …Forty years of experience have taught me you can make money without ever knowing which way the market is going."

That stands true even today. If you’re an investor and investing through the market cycles regularly with the help of financial experts, you may have made loads of money. A 10-year study on the equity market, from any point in time, tells us that equities will always deliver returns higher than most investment class. So, if you’re a small retail investor having invested at the peak of the 2003-2008 Bull Run don’t panic. Your investments will fetch returns. Remember, even during the dotcom burst, there were many who said we will never see the Sensex at 6000 again. In less than a decade, the Sensex turned market pundits wrong and zoomed to 21000. Have faith.

It’s true that nobody can time the market. But, a little help here and there helps. For instance, CNBC TV18’s 8-year equity cycle model shows that once market is corrected 40% odd, there is a consolidation phase that would last for some months. During this period the market can slowly edge down some more. This is a time where the risks to rewards ratio are perhaps on the higher side. So, be in the news. Use such opportunities to increase returns, but don’t rush into positions. After all, longer the consolidation period, the better your chances of getting a higher return on investment.

Diversify Your Investments

Equity is not the end of the investing world. There are many other investment classes. After all, a bad equity market could essential mean that you may have to sell your investments at much less in case of emergency. Diversification always helps. Don’t be lop sided with all your investible surplus into equities. The generally acceptable thumb rule to investment into equities is ‘100 minus your age’. The rest can be in debt, gold, fixed deposits, government securities, among others. Also, don’t diversify randomly. Your friendly neighbourhood investor is no expert. Don’t copy his investment style. Take help from your own professional financial advisor. Qualified experts charge you a fee, which is essentially very small when you compare it with the long term benefits you may derive from your ideal portfolio.

For equity investing too, it’s always better to diversify across 3-5 fund houses. Remember historical returns and no indicator of future performance. Take that with a pinch of salt. Do your home-work.

To conclude, well begun is half done. All the above is elementary. But, at least you begin somewhere. Post that, its keeping yourself updated with the news. Do you remember the time you bought your first television set. Exactly. You checked several stores, looked for value and searched for bargains. The same applies while investing your hard earned money into equities. And like you throw away your old television set when it’s obsolete or down, the same applies to equity investments – sell equities only when essential. Stay invested, don’t panic. You will derive value along the normal curve.

Disclosure: The author is not permitted to trade and/or invest into the equity market directly or indirectly, apart from investing (long only) in mutual fund products. His equity exposure is only to the extent of ESOPs granted by the employer.