The newspaper headlines today were quite predictable, one screamed
Ace Investment Management Services(AIMS for short) is one of the leading Investment Advisory firm with a reputation built on trust! With nearly 2 decades of rich and varied experience, a thorough knowledge of the markets, proficiency in risk management, we offer a wide range of personalised investment advisory and financial planning services. We strongly believe that managing money requires more skill than making it, because your money has to and should work harder than you do!
The newspaper headlines today were quite predictable, one screamed
Investors have just become a lot poorer!
The weakening of the crude along with the 20% upswing of the equities from the lows of July 2008 has made investors doubt the sustainability of the up move! The worry is whether the upbeat seen in the corporate profits in Q1FY09 can be sustained in the Q2 FY09 or not?
Equity markets are supposed to be a place to invest your extra money for the long term. A steady and patient investor in the Indian stock markets would have made nearly 20% every year for the past about 28 years. The steady investor would have made about 160 times his initial investment over this 28-year time period that has seen Indian politics head from bad to worse.
The long term potential for the growth of the Indian economy has not changed. The long term potential for making your extra money earn more money while you go about your daily work has not changed. What has changed is the greed of the gambling crowds. The greed which was evident until December 2007 has now turned to a panic like fear.
Underlying Strength
The oil prices have increased. Food prices have zoomed. And the cost of borrowing money has increased. To top it all, we have election coming up. All of these will cause some slow down and some pain. But a lot of these factors are cyclical—their importance tends to shine or fade over time. We have had elections before –in fact 7 elections between the 1980 & 2008 time period. We are still around and relatively more prosperous as a country. Why should things be different after the next election?
As an investment manager, the challenge is not figuring whether FIIs will come again to invest in
The reality is that there are many companies that will do well over the next few years whose share prices have been hammered. These are great stocks to buy because of the underlying strength of their businesses. So as the short term investors sell the stocks, we should be happily buying the businesses that those underlying stocks represent.
It is useful to think about ways and means of keeping the level of the market from swaying our investment decisions completely. If your favourite restaurant runs a discount on its Mexican menu, you may not choose to have it for breakfast, lunch and dinner, only because it is cheap, isn’t it? You would surely think that whether you are hungry, and whether you like Mexican cuisine are more important than the rock bottom price. Importantly, your choice of what you will eat will be driven by you, rather than what is on offer. We need to bring that common sense principle into investing as well. To an investor who hates any loss in the value of his portfolio, equity markets are a no-no even if the index is at a very attractive level. Just as my father will refuse to have pizzas for dinner, and my daughter will cringe at porridge. Therefore step one is to ask whether we like to be in the markets at all, and understand why we want to be there. If we figured that what we do with our investments has to stand on its own, driven by our needs and preferences, half the battle is won.
Sadly, just as we sneak in a samosa even as we are working out the fat, we find it so tough to actually implement what is good for us. There are well known behavioral traits that we have, which come in the way. Many of them bias our judgment and our decision. We may like to invest some money into equity at the current levels, having seen that corporate profits are healthy and fundamentals are good. But we will be worried about the fall in price that we have seen. It is so important to see some rise in price, before we buy, because we are led by our recent experiences. We are enthusiastic buyers when markets have moved up, and when everyone else seems to be buying. We seldom buy cheap. Somehow we think it has to be a good thing to do, if many people are doing so. Then, we like what we buy and refuse to accept that we could have a loser on hand. When we see prices falling, we convince ourselves that prices will somehow recover to our price. We are very clued to our price, that it becomes some kind of mental benchmark. But the market does not know this and is unlikely to care. So we tend to keep losers, and refuse to reckon the loss. If we bought at Rs. 100 and the price fell to Rs. 20, we lost 80%. When we continue to hold what we bought, and hope it will go back to Rs. 100, we are expecting a 400% increase – not realistic isn’t it? At every decision to buy or sell, we need to fight the bias to implement what is good for us, and many of us find it tough to do so.
The moral of the story is, we may have a nice little strategy of investment, but if it is driven only by the level of the market, and not by our needs, there is a risk. That risk becomes higher, when our decisions about the markets are biased and our thinking about the market and the way we make our decisions are far from optimal. When we combine the craving for the right time to buy into the market, with the biases that we suffer, we could put our investments in danger.
There are two things we could do, if we accept that this is a problem, and that we need to do something about it. One – we have a plan that we implement, without caring about where the market went. Two – we let professionals manage our money, so the call on markets is not biased. The mutual fund choice is sensible, because it enables us to implement disciplined investing in our own way, leaving the "market watch" to the fund managers. And having the fund managers to watch your money is a nice way to side step the bias. A fund manager is bound by investment processes and risk controls that take care of bias we will suffer when we deal with our own money.
Some Wealth Inspiring thoughts
Ø Timing is vital. It is much more important to buy cheap than to sell dear.
Ø Time in the market is more important than timing the market.
Ø It is never your thinking that makes big money, it is sitting.
Ø Success in market usually comes to those, who are too busy to be looking for it.
Ø Managing money requires more skill than making it.
Wealth as they say is like old wine. The more time it takes the longer it stays for you to savor it!!
Stock Market is generally feared by all! And may be rightly so!! Investors usually see – or rather made to see—the short term fluctuations rather than the long term upside potential which comes steadily but without much of an announcement! It’s the short term upheavals are talked about in every newspaper—much to the contrary!!!
Your would not find many investors talking about say Tata Steel moving up from a level of Rs. 530/- a year back to Rs. 745/--- a cool 40% gain! Rather you will come across many investors crying hoarse about the price of Tata Steel having gone down from Rs. 900/- on 29/10/2007 to present day price of Rs. Rs. 745/- -- a fall of 17% in just 8 months!
We at AIMS have always believed that time in the market is more important than timing the market! A 40% gains over a single year easily drowns in the din of 17-20% fall in a matter of months!
What is true for Tata Steel is true for any investment even for a Mutual Fund. We believe that Mutual Fund is the route for retail investors! It is not that we despise or discourage direct equity—direct equity is preferable only if you have the habit of digesting the fluctuations and also have the time to do your research because investing without research is like playing poker without looking at the cards.
Another compelling reason for investing in Mutual Funds is highlighted in the last wealth inspiring thoughts as stated above—managing money requires more skill than making it!
There are very few options currently where the real returns -- returns in excess of the inflation—are positive. Hence investments in PPF, Post Office; RBI Bonds or bank deposits tend to depreciate your corpus rather than appreciate. They will in all likelihood not see you through your retirement or even be able to fund your child’s higher education! Only Equity has the power to give you inflation adjusted returns!! Consider this :- a monthly investment of Rs. 1,000/- in DSP Merrill Lynch Equity Fund from 02/05/1997 till date would have grown from Rs. 1,33,000 to about Rs. 8,46,000/- -- a compounded annual growth of 20.32% (Source DSP Merrill Lynch Mutual Fund). AND THAT TOO TAX FREE!! This in spite of Dot Com meltdowns, Kargil, 9/11 etc.
The thought now looming in your mind is “What Now”? “Where will the market stabilize”? Whether this is the right time to invest or not??
We must admit frankly that we are unable to forecast the index level from where the markets would start climbing up! No body in this world – not even the legendary Warren Buffet—will be able to predict the index level!
As for “WHAT NOW” – we can only say that the India story is very much alive and with a heavy discount sale currently on – GRAB IT—before it’s too late!!
At the end we would only repeat what Lord Krishna said to Arjun during Mahabharata – tum karm karo, phal ki chinta mat karo (Do not worry about the results, just do your duty!)
Investing is your duty TODAY!
Happy Investing!!