Do it yourself Risky Attitude “While making money?”
This article is from my friend Anad Agarawal expert consultant in Money Investment & Money making, talks about – the common attitude of Do it yourself & Risk involved in it. Please read it carefully “It is an eye opening for me & that’s why I am sharing with you all immediately ” It talks about mutual fund investment but the learning’s you can apply every-where.
Of late, I am seeing a new breed of investors emerging once again – the Do It Yourself (DIY) Class of investors. They pick up bits and pieces of information from the print media, internet and the several TV channels and start thinking that they have suddenly become experts in investing.
Some of the common mistakes being made by them are:
1. Making a decision to invest in a Mutual Fund based on past performance alone. They visit various Websites that rank the funds based on past performance alone and then start investing in some of the top ranked funds. To illustrate my point, I give below the data of the top 7 funds that gave the best returns over a 4 year period as on 31 Dec 2007.
Table 1: What has gone up … will come down
1 Jan 2004 to
31 Dec 2007
1 Jan 2007 to
31 Dec 2011
|SBI Magnum Global||1/94||119/225|
|SBI Magnum Contra||2/94||147/225|
|SBI Magnum Tax Gain||3/94||126/225|
|Sundaram Select Midcap||6/94||74/225|
|SBI Magnum Multiplier+||7/94||116/225|
Looking at the data in the second column, the DIY Class of investors will start investing money in these funds only. But if you see the data of the third column, they end up getting dismal results after four years. Then they start cursing the market or their own bad luck and pull out all their investments and decide never to invest in this avenue again. And to top it, they even try to prevent others from investing in these avenues.Now let us see what could have happened if they had invested in some of the “bad” funds instead.
Table 2: What has gone down … will go up
1 Jan 2007 to
31 Dec 2011
1 Jan 2004 to
31 Dec 2007
|Tata Index Sensex B||1/225||94/94|
|Quantum LT Equity||2/225||NA|
|DSP BR Top 100 Equity||3/225||26/94|
|Birla Dividend Yield Plus||4/225||87/94|
|ING Dividend Yield||5/225||NA|
|UTI Dividend Yield||7/225||NA|
Looking at the data in the third column, the DIY Class of investors will never invest money in these funds. In fact their favourite website has put these funds in the RED category and given a strong “SELL” signal. But if you see the data of the second column, they end up giving the best results after four years. Strange, isn’t it? Now let us try to analyse why such a thing could happen and will keep on happening.
Everybody knows that to make a profit in the Share Market, you must buy low and sell high. But in reality, almost everyone keeps doing exactly the reverse. They will not invest when the markets are down fearing that the markets may go down further. So they wait for the markets to go up by say 1000 points and then start investing. Next week, the markets go down 500 points so they panic and sell to STOP LOSS. But in fact they are incurring a real loss because the bought high and sold low !!!
Now they will not invest till the markets go up by 2000 points. Immediately after they invest, the markets go down by 800 points so they again panic and sell. Now that they have become “wiser”, they will not invest till the markets go up by 4000 points. Immediately after they invest, the markets go down by 1200 points so they again panic and sell. They constantly keep losing money and then tell others also not to invest in such dangerous avenues.
But it is a universal truth that a vast majority of people think “I am smarter than you” and a few even think “I can beat the market”. So they do not get tempted to invest by the small rises. They wait for the market to double or even triple and then start investing large amounts in the top funds of Table 1. Some may even pull out their investments from the so called “bad” funds of Table 2 to invest in the “better” funds of Table 1.
As a result, the so called “good” funds get loaded with investments made at the highest level by a very large number of investors. Then the markets start falling. This time they will not panic because “we know” the market will bounce back. “We have seen” the markets fall and bounce back several times in the past. So now there is “hope” even while the markets are experiencing a free fall. Only after the market have fallen 50% realization dawns upon the majority that things are really bad and they hit the panic buttons and sell fearing that the markets will go down even further. Needless to say, after the majority have exited, the markets will rise again !!!
History will keep repeating itself. The “old timers” may now keep quite and/or stay away from the market for the rest of their lives, but a new breed of DIY Class of investors will emerge.
So what is the lesson to be learnt? DIY may have been a good thing while you were in School or even College. But in real life it is better to do it with someone else. And investing is best done with the help of some experts. The experts real job is to manage your emotions and NOT your investments !!!
Even the best expert has absolutely no control over Market. But he can help you to exercise control over your emotions and prevent you from getting swayed by mass euphoria and making the same mistakes highlighted above. Before closing, I would like to focus on one more common trait. A lot of people tell me that they would like to start off by investing only a small amount to begin with and see how it goes for some time and then decide the future course of action. I fail to understand what they are trying to “test”.
To illustrate this point, I will tell you about a real life incident. A Senior Manager from Infosys approached me three years ago saying that he has 1500 Shares of Infosys worth about Rs 42 lakhs (@ Rs 2800 per share). Instead of seeking advise, he only wanted to tell me his strategy and wanted my opinion on it. He said “I am managing an account of USD75m so I know very well how to manage my wealth as well. I am only seeking your opinion on my strategy”.
His strategy was to sell 1000 shares of Infosys and put Rs 14 lakhs each in some Debt Funds and Equity Mutual Funds to achieve equal investment is three assets – Infosys Shares, Debt Funds and Equity Mutual Funds. He said I will wait for 3 years to see which asset gives the best returns and then put all my funds in that asset for the rest of my life.
Now three years are over. Infosys shares are down 20%, the Equity Mutual Funds are more or less at the same level and the Debt Funds have given a CAGR of 8% p.a. Going by his past decision, he would be selling all his Infosys Shares and Equity Mutual Funds and investing everything in the Debt funds where he may get only 1 or 2% over and above inflation for the rest of his life. What a pity?
Please forward this information to all your friends so that they may also be aware of the common mistakes being made and try not to make the same mistakes.
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