Monday, September 27, 2010

Is it time to fool the retail investors again?

The Indian stock market looks all set for another bull run. Take a close look and you will realise that the run up is already in motion. In the beginning of this year, March 2009 to be exact, NSE Nifty was around 2600 mark, now it stands at above 6000 points. That is a gain of about 131% over a period of 18 months. What is remarkable is that all this has happened at a time of global gloom. All most all major markets were looking south but the Indian market defied all that bad news and moved from strength to strength. The run up (till now) is fueled by money from domestic and foreign institutional investors. The retail investor is no where to be seen, they are sitting in the sidelines and licking bruises of 2008. This is evident from the fact that the run up is an index only event and is not seen among the mid caps or small caps.

If (yeah!,it is BIG if) things go well globally, the Indian market would be literally showered with good news from all quarters. The market sentiment would hit the sky and that is going to boost  the indices to  new all time highs. As usual, the retail investor will get to know about it very late. They will the see soaring indices and   the extremely high valuation of shares. The stock market experts on TV and other media would compete among one another to predict the next  high. The media would be filled with reports on the thousands of crores that were added to the market caps, Mukesh Ambani becoming the richest person in the world, India rising, rags to riches stores etc etc etc.  All this will make it too good to resist for the retail investor and like the moth to a flame, they will enter the market. By this time most of the shares would be over priced and only a greater fool would save the retail investor and they will have to find that among themselves.

We have seen this happen every time there is a major bull run in the market. The big player in the market makes all the big bucks at the expense of the retail investor.  This gives the market a bad name and the majority of the population stays away from the market. At present, less 2% of household savings go to the equity market. What can we do to turn the tables here? The usual answers are to educate the general public about financial market, urge them to do more home work before investing, think long term etc etc. All this looks good on paper, doesn't work on the ground. Why, because the retail investors are not Rakesh Jhunjhunwalas or Waren Buffets under the hood. They don't want to think about the P/Es and quarterly profits before investing their hard earned monies. What they need are smart investment products that are tailored to the needs of the Indian retail investor. These should not be an invented in the US and sold in India kind of product. The product should have to go beyond what the mutual fund has to offer. I know it is easier said than done, needs some very smart thinking but whoever does that has huge bottom pyramid market to cater to.

So until then we have a huge gullible mass of people out there and  as the saying goes fool and their money are soon parted.

Tuesday, September 21, 2010

5 reason's why this is not the time to invest in Gold

5 reason's why this is not the time to invest in Gold

With the recent rally gold is now at all time high with prices RS 19169 per 10g. Is this price justifiable? This is a question asked by people ranging from investors to country heads. Here we are listing the top 5 reasons which we think , why you should not invest in gold now.

     1.    Gold ETF's may bring trouble
                   We all know's country's accumulate gold. But surprisingly 7th largest gold holder in the world is not a country but an Exchange Traded Fund (ETF) named SPDR Gold Shares (GLD). So if some huge investors in these funds decide to dump their shares or liquidate it, who will buy these tons of gold? This surplus supply can cause the gold prices to crash.

     2.    Economy is showing recovery signals
                 Gold price rise is not because people buy more jewelry. It's because people fear hyper inflation and value loss of paper money. Because of this experts says buying gold is a 'fear trade'. Few days back NBER said US recession ended in june 2009. So as economy recover and people become less 'fear' , there is a good chance that gold prices will ease.
     3.    Gold still not good as a long term investment option
                 Even though the recent run up of the gold will make us think , to consider gold as a perfect thing for long term investment. But the truth is different. Golds last high was in 1980, where it was around 850 RS per gram, which has now reached 1915 RS. This is not a good growth if you adjust it for inflation during this time. 

     4.     If the bulls are back - Gold will be in trouble.
                   Historically the price movement's of gold is very well linked to the equity market. When the markets are on an upward momentum people and enterprises will move their Gold investments to equity to fetch better return. And when the market is under the Bear grip / down turn people will take back the money from equity market and put it in gold. So even though Indian markets are on a rise now, the global markets are yet to move out of the down turn. So once the global indices is moving up , the investments n gold may get moved to equity, which will lead to a heavy correction.

     5.    The very recent spike is just momentum driven
                   Gold has spiked a lot in the recent months. And no one can point out any fundamental reason for it. Neither it's because of  the changes in economy , nor the market, nor the natural demand. And it's suspicious enough to doubt some one having a hand behind this. 

Tuesday, September 14, 2010

Are we irrational investors by design?

Are we rational beings devoid of emotions when we make our investment decisions? Modern investment theories like CAPM (Capital Asset Pricing Model) or EMH (Efficient-market hypothesis) make this assumption that we humans are rational beings who try to maximize our selfish interest. Human emotions are seen as external factors that do not play any role in investment decision making. This assumption gives rise to the idea of a species called homo economicus or "the economic man" which is found only in economic books. To me, homo economics sounds more like a Vulcan (i.e. the alien race of the Star Treck character Spock) than human.

We humans are emotional, complex and often irrational beings who are affected by emotions and actions of others around us. These human traits have served us well in our evolutionary journey to reach the top of the evolutionary pyramid. Financial investment are relatively new activities in our evolutionary journey and the skills that evolved over millions of years of evolution may not work as well here. For example we are more adept in thinking in relative terms than in absolute terms. Thinking in relative terms, like am I stronger than the other person or am I more attractive than the competition, worked well than thinking of an absolute number that represent your strength or beauty. When it comes to investment, we need to think in absolute terms than in relative terms. This is more significant in cases where the outcome of the decision is risky. Following experiment makes this more evident.

Assume that you are in a situation where you are given Rs 1000 to keep and then presented with two options. If you choose option one you would be given Rs 500 more to take home and option two is that a coin is flipped and if it is heads you gain Rs 1000 more and if it is tails you loose nothing. Which option would you choose?

Now let us consider another situation, where you are given Rs 2000 to keep and then presented with two options. If you choose option one Rs 500 will be taken away from you and option two is that a coin is flipped and if it is heads you loose nothing and if it is tails you loose Rs 1000. Which option would you choose?

What is seen is that majority of people choose option one if the first experiment and option two(which is more risky) in the second experiment. In absolute terms, both the experiments lead to the same out come a 50/50 bet for Rs 1500 but we had two entirely different choices. This human behavior is know as loss aversion and it tends to make us take more riskier choice in decision where losses are involved.

The most interesting thing is that in an experiment Capuchin monkeys have shown the same loss aversion behavior as human being. This points to the fact the irrational financial decisions are results deep rooted genetic deficiencies in human beings. It is more like the incapability to fly like bird or swim like fish. This has not prevented us from conquering the skys or swimming in deep oceans. We invented tools to overcome our deficiencies, just like that we will have to develop financial tools that will help us over come our genetic deficiencies and make better financial decisions.

Jerith Shajan

Sunday, September 5, 2010

5 things Priority Inbox teaches us

Google added a killer feature named Priority Inbox to it’s hugely successful product Gmail and to the Google apps users. This is a must use feature for heavy gmailers like me. This feature tries to intelligently filter the important email from the less-important email in your inbox. Here am trying to see , how this is comparable to real life.

1. All Have Priority’s in life

It’s not necessary to be a CEO or President of anything, for you to prioritize things. All should prioritize their on tasks, people, leisure, love, sleep etc in their own way to be masters of them selves. See that's why Google gave this feature to all, not just for the power user.

2. Check and change your priority as and when required

Priorities in life change over time. Don’t forget to change it as life moves own. During bachelor days, Saturdays are mostly for party and booze, because the priority set was like that. This needs to be changed once you move on in life. Unless you set it right, you can’t concentrate on emails or on your life

3. Avoid Distractions

The main advantage of Gmail Priority inbox is to avoid getting distracted by the unnecessary mails. Similarly we should take note that Time is precious, so one shouldn't waste it with unwanted distractions. Always Focus on what is important for you.

4. Keep daily Things to do List

A daily To- do list always help you to complete your daily tasks with out fail. The priority inbox acts like a To-Do or rather To-Read list of the most priority emails, which is to be read, reviewed or pushed to later as per it’s importance. Similarly in life, one should have a similar list to do things faster.

5. Verify Out comes, and improve it over time

Always check on the level of success you get. And re prioritize things always to get the best result at any time.

Jerith Shajan