Stop sitting on the fence

This article was published in Business Standard on Sunday, September 30, 2012


After lying low for a number of years, there are several reasons why retail investors should look to the stock market

For the past two years or so, if any retail investor asked a ‘financial expert’ whether this was the right time to invest in the stock market or not, the answer would invariably have been, ‘Refrain for the time being and enter when there is more certainty’. Investors appear to be taking this advice rather seriously.

We read reports in various media as to how retail investors have jettisoned stocks and fled to safer havens such as gold. This phenomenon is not restricted to India alone. The abiding global sentiment prevailing today is that stocks are ‘risky’ and should therefore be avoided. The grief-inducing headlines in various newspapers are further cementing this belief (the past two weeks notwithstanding). Everyone says that they will invest when times are ‘more certain’. Continue reading

A few learnings revisited on Teachers’ Day

Jayant Pai |

It is a truism to say that we never stop learning….One way of doing so is to learn from the hard knocks that life sometimes give us. Another is to listen and learn from people whom you respect.

Today, on Teachers’ Day, I look back at a few things that I have learnt outside the classroom.

 My Chairman, Mr. Parag Parikh (Whom I consider a treasure trove of wisdom) has taught me several things over the years. A few of them are :

 In life, you may come across shades of grey but that does not mean you deviate from the path of black & white…

 It means that there may be several times when you may be tempted to stray from the path of the straight & narrow, and console yourself that that certain ‘grey situations’ compelled you to do so. However, true accountability demands that if one does deviate one must take full ownership of that decision rather than take the cowardly way out and blame everyone else but yourself.

 Everyone has the same 24 hours in a day :

Hence do not make the excuse that you did not find the time to do something. A time management lesson condensed into one sentence….

 Do not neglect any of your faculties :

 All faculties viz. the physical, mental, and spiritual are important, Hence do not shower attention on one to the detriment of the others.

 Be equanimous :

 Neither joyous times nor depressing times are permanent. Hence cultivate the art of being equanimous.

 Apart from Mr. Parikh, others have also influenced me in subtle ways, either through their words or actions….

1. My aversion to borrowing and focus on prudent spending & investing is the result of lessons instilled in me by my father and grandfather. This has certainly saved me in an environment where instant gratification is all-pervasive.

2. It may be competitive out there but there is always room at the top

Noted consumer activist, Mr. M.R. Pai said this to me over two decades ago. While I am the last person to be bothered about the rat race, I always aim at excelling in my chosen domain of ‘Personal Finance’. Today, there are several people purporting to offer advice but the number of credible advisors are few and far-in-between. For me credibility is paramount, in my dealings with the media and with consumers. It is the only way one can stand apart from the crowd.

3. My CEO, Rajeev Thakkar’s balanced approach and his penchant for meticulousness is something I am striving for.

There are also publications like ‘The Economist’ and ‘Mutual Fund Insight’ which have shaped my opinions and ideas.

Finally, there is one statement attributed to Warren Buffett which has influenced me deeply viz. “The chains of habit are too light to be felt until they are too heavy to be broken”.

I hope you do not consider this write-up as an article in self-indulgence. There are a few points here which could benefit everyone.

Also, while several of these may seem elementary, today seemed to be a good day to revisit and reinforce them. 

Information overload?

Jayant Pai |

Don’t get confused. Create a reading list of your favourite newspaper, website, research house to take informed decisions

This article was published in Business Standard newspaper dated September 2, 2012

Buy ‘X’ share, sell ‘Y’. Stay invested in mutual funds… exit some schemes. Outlook for gold is good…sell gold…

Different channels, newspapers, websites, blogs, research reports… sure, there isn’t dearth of information. While business channels and magazines were anyways into an overdrive, many general news channels have also jumped into the fray. The worry: Much of that viewership is only for the daily stock market related programmes and not for other personal finance programmes. And even among personal finance programmes, many question sonly pertain to stocks, with other aspects (such as insurance and mutual funds) taking the back seat.

It is, therefore, surprising that despite our seemingly avid interest in the stock market, every day we hear that retail investors are exiting the market or stopping systematic plans and so on. In fact, the quantum of wealth actually invested in stocks is barely 4 per cent. Even mutual fund distributors have actually come down, and not gone up. Though many blame it on the entry load ban, the jury is still out.

Obviously, this overload of information and the so-called keenness to know about stocks and their future has not translated into much real money coming into the markets or for that matter, mutual funds. Why is this so? Some of the reasons could be:

Too many advisors but no accountability

This is paradoxical but true. Rather than increasing the number of investors, the rate of rise in the advisors hasn’t really helped them. Though there is no data to back this up, one can clearly see it from the absence from retail participation in the market.

Many complain that they are confused by diverse views. The fact is that it does not take much to be a stock market pundit. Spout a few words of jargon, pop-up on a couple of business channels and voila… you have a fan following. Follow this up with a website dedicated to proffering “advice” for a subscription fee and you are ready to go. However, when it comes to accountability for the advice, these people turn coy, blaming everything (even acts of God), except themselves when stocks do not perform the way they say they will. There is also no rating system of how many ‘hits’ or ‘flops’, these so-called advisors have.

But if any retail investor has burnt his/her fingers by putting their money on their advice, the financial loss is good enough to put them, perhaps, even their near and dear ones off. In other words, the absence of accountability hurts the overall sentiment towards stock markets very badly, as many stop investing after being saddled with a few dud recommendations.

Too much data but little explanation

Till recently, research agencies would criticise companies but not give a ‘sell’ because the banking or broking or other arms of the group would lose business. While much of that has changed because of overall bad market conditions, investors are often confused that even after reams of data pointing against a company, why seldom there is a ‘sell’ recommendation.

In other words, there is a “Tyranny of Choice” when it comes to market information. The ticker rules our lives (thankfully, we are spared on weekends), we are bombarded with statistics of all hues, be it the cash segment, F&O segment, institutional activity, quarterly results, etc. Unfortunately, just as a glass can hold only so much water, our brain ceases to process information beyond a point.

Feeding it with more makes it freeze into inaction. Many are in that state nowadays, overawed and overwhelmed by the deluge of information, but there is seldom concrete solution or recommendations.

Few can stomach volatility

We are spoilt. In the good old US-64 days, we were promised 18-20 per cent without any labour. Despite the realisation that the scheme had to be stopped because it promised too much without the fundamentals supporting it, we still want to live in those good old days.

Often people inquire with me as to which stock is a good investment. While I do not have an idea a day, I do name a few good stocks once in a while. However, after a few days or weeks when I ask them whether they have invested, most of them say they have not done so, because the market is too volatile right now and they are waiting for it to stabilise. Well, I often joke that markets are stable only over the weekend and that too because they are closed. Volatility is part and parcel of any market. If you cannot stomach it, you should not be inquiring about stocks in the first place. Also, the media, instead of assuaging the viewers actually feeds on such volatility and makes mountains out of molehills making remarks like “Market crash reduces investor wealth by thousands of crores”. Extreme statements like these, scare off several potential investors who are sitting on the fence.

I think the best way to deal with this situation is to cut ourselves off from the clutter. Mentally, we can create our own list of favourites such as one favourite TV channel, one favourite website, one favourite magazine, etc. and stick only to those. They usually talk about the same developments anyway. With regard to self-styled advisors, zero may be a good number… After all, often their guess is as as good as ours.

Also, it would help if we changed our mental model of investing from one of action to one of inaction. Every source mentioned above (stockbrokers included) want you to do something. The shorter your horizon the better for them as they generate more income off you. Well, frustrate them by holding on to good investments for long periods of time. Stop being the sacrificial lamb at the altar of their greed.

Finally, treat volatility as a good friend who actually helps you buy good stocks at reasonable prices during panics.

‘Estimates’ or ‘Guesstimates’ ?

Jayant Pai |

Every quarter, sell-side analysts embark on an activity which I find perplexing….making and disseminating ‘Earnings Estimates’. Every brokerage house, releases such estimates for many large-cap companies (and a few small companies). There are a couple of points which are common across all quarters:

1. Clustering: It is remarkable that there is hardly any difference in the estimates which are made prior to the results, irrespective of whether it is a globally reputed brokerage house or a hole-in-the-wall broking outfit. My guess is that the larger ones base their estimates on the figures given out by the managements during ‘closed-door’ meetings, as well as the periodic ‘guidance’ given by them. The smaller ones simply piggyback on the larger brokers’ estimates and pass them off as their own. In either case, there is not much of analysis involved.

2. Variance: Often there is a significant variance between the estimates and the actual figures. Sometimes, even the direction of the actual results is not the same as that estimated. So much so, that in the USA, there is an indicator known as the “Earnings Surprise Indicator” which measures the variance of the variance. Confused….Well, you are not the only one.

To me, the whole exercise is quite absurd. I mean, in most firms each analyst tracks three to four sectors. Now, each of these will have a couple of humungous companies / conglomerates involved in a diverse range of activities. Given the number of moving parts, I think even the managements of these companies know that it is futile to indulge in quarterly predictions. However, the analyst at the brokerage house (who is often a multitasker and not an industry specialist) apparently can do what the top management of the company dare not, i.e. give precise predictions.

I also wonder who really tracks and believes these estimates. Seasoned investors may not even look at them as they have proved to be wrong on too many occasions. Maybe the media is more keen on knowing these numbers more than anyone else.

I am happy to see that some companies are desisting from providing quarterly guidance, as they believe that this practice encourages short-termism. If this trend gathers momentum, then, maybe, analysts will have to begin analysing and not merely reporting….