February 2016

July 2010

Octopus Outshines Investment Bank Experts….

Opaul_the_octopusctopus Paul , has been making headlines world over in this years FIFA world cup. It’s predictions on winner of football (soccer) matches is hitting Bull’s eye. Specially after the German defeat in Semis to Spain, the popularity of Octopus Paul has soared to new heights. It is a superstar. Although Germans are now demanding death threats. PETA is demanding the octopus be let free.

Well, almost anyone who is someone (except human ‘Pauls’) has an opinion on Paul …….

At least my children now know a little more about the octopus species. OK So much for that……

Now, I knew the following would come comparing the Octopus to Investment/Bank experts …And here we go at a cnbc story…  UBS, for example, gave Spain just a 4 percent chance of winning the trophy with their past performance model. The Netherlands, who meet Spain in the final Sunday, had just an 8 percent chance, the bank said. And our dear expert – Paul has nearly been flawless – o to say – ….. More at the following cnbc report

Somehow , Brought to my mind the famous orangutan coin flipping competition.

In 1984 Columbia Business School hosted a celebration of the fiftieth anniversary of Graham and Dodd’s book Security Analysis. The two principal speakers were Rochester’s Michael Jensen, an academic who had come out strongly in favour of the Efficient Market Hypothesis and Warren Buffett. Jensen stated that it was hard to tell if any of the followers of Graham and Dodd were really superior investors. He argued:

If I survey a field of untalented analysts all of whom are doing nothing but Flipping coins, I expect to see some who have tossed two heads in a row and even some who have tossed ten heads in a row.

This was a perfect entry for Buffett who envisaged a national coin-tossing contest. Each day, everyone in the United Sates flipped a coin with only those who continually flipped heads staying in the contest. After twenty days only around 215 flippers would remain. Buffett continued (Buffett, 1984):

But then some business school professor will probably be rude enough to bring up the fact that if 225 million orangutans had engaged in a similar exercise, the results would be much the same—215 egotistical orangutans with 20 straight winning flips.

Buffett then argued that there were important differences. What if, for example, all the orangutans came from the same zoo? When you replace head-flippers with “superinvestors”, he argued that this is precisely what happened. Buffett declared that there was an unusually high concentration of successful coin flippers, that is, “superinvestors”, in the investment world that “came from a very small intellectual village that could be called Graham-and-Doddsville”.

So coming back to Octopus Paul and the few super analysts in the investment world who get it right.
The big question to ponder is : Is it chance or is there something more to it….

March 2010

Costly Investment Mistakes to avoid at all costs – Part III

Costly Investment mistakes Part 3, Investment Planning, Financial Planning, Stocks, Mutual Funds Investing, Life Planning, Goal Oriented Planning.

In the process of investing, one often makes mistakes.

Here are some of the most common investing mistakes which investors generally make and some of which even I had made in the earlier part of my investment years

Of course, learning from the mistakes, continually, the investing experience has truly been rewarding experience.

You can also cultivate good habits of investing by avoiding the following mistakes.

This series is in continuation to the earlier 2 posts which contains the first 5 common mistakes committed by investors. You can read posts here at ( Part I and Part II )

This post ( Part III )  will throw light on the following common mistakes generally committed by investors:

#6. Having Unrealistic Expectations from Investments & Wrong understanding of Risk

Indexes (Sensex and Nifty) have gained more than 85% returns from the lows of March 2009. All the TV channels and newspaper headlines have started to focus on this aspect a lot andfuel greedin common people. Similarly just 2 months earlier to March 2009, or so,  when there seemed no end to the global markets falling down, were down more than -ve 50% , the same TV channels and newspapers were fueling fearsinto the minds of the people.

Expecting similar returns consistently from the stock markets is one of the common mistakes. This happens when expectations from the market are unrealistic (like doubling money in 1 year. etc).

The other side is when there is fear in the markets there perception that markets are extremely risky and all investments should be moved to safe instruments like FD’s etc.

Point is :

Markets test patience and reward conviction.

1. Equity Markets cannot keep rising 100% year on year every year & cannot keep falling 50% year on year every year.

2. There are various phases to the markets, long periods of range bounded ness, sudden spurts either up or down due to sentiments, global factors etc.  All this causes violent moves in the markets in short term. In the long run or long periods of time 5yr, 10yr, 15yr the ups and downs and returns from the marketseven outtoyield mean (or average) realistic returns. Being aware of this point is important.

3.Riskin equity marketsappears very highin short period of time. HoweverRisk in Equity markets is reduced significantly when investments are spread over long periods of time.

4. Risk and Returns are inseparable. Once the objective is clear which is get better returns over a period of time, then you must be willing to invest in instruments which carry more risk, intelligently. And marry the risk with passage of time to yield good returns.

#7. Leaving Investments in Auto Mode – No Periodic Assessment, No periodic Re balancing

You do periodic health checkup with the objective of finding if there is any need to take preventive measures to keep the body in good shape. If you are gaining weight and becoming overweight, you need to start taking steps to cut down on the weight. Similarly, if you are losing weight and have become underweight, you need to start taking steps to regain health.

Similarly, periodic assessment of portfolio (once a quarter, every 6 months at least) is necessary. This has to be done with the similar objective of taking preventive measures (if at all required) to keep the portfolio in good shape. Portfolio rebalancing has to be done as per asset allocation.

However, many investors make mistake of leaving the portfolio in auto mode once the investments have been made. Investments is indeed a long term process, but If some investment goes sour, and it is not acted upon in a timely manner,  it probably becomes too late / or too costly to get the portfolio back on track , if preventive measures are not planned and executed.

Final Part to be contd…… You can read the final installment here at Part IV

Costly Investment Mistakes to avoid at all costs-Part II

Costly Investment mistakes Part 2, Investment Planning, Financial Planning, Stocks, Mutual Funds Investing, Life Planning, Goal Oriented Planning.

In the process of investing, one often makes mistakes.

Here are some of the most common investing mistakes which investors generally make and some of which even I had made in the earlier part of my investment years

Of course, learning from the mistakes, continually, the investing experience has truly been rewarding experience. You can alsocultivate good habitsof investing by avoiding the following mistakes.

This series is in continuation to the earlier post which contains the first 3 common mistakes committed by investors. You can read the Part I here. (Costly Investment mistakes to avoid at all costs – Part I)

This post will throw light on the following common mistakes generally committed by investors:

#4. No “Homework” before getting into Investments, and learning costly lessons afterwards: Lack of understanding
Doing what’s right is not the problem. It is knowing what is right.

This mistake is akin to putting the cart before the horse. Adequate homework needs to be done before investing in any financial products (eg: Stocks, Mutual Funds, Real Estate, ULIP’s, Child Insurance Plans, PPF or even FD’s for that matter) .

You should understand the products well, understand the risk-reward ratio, understand the expenses

involved, tax implications, and do not easily buy an investment just because someone wants you to buy it. You need make sure that the investment objective and risk tolerance are compatible with your investment goals.

Even the world’s greatest investor Warren Buffet core philosophyis to not investin business models which hedoes not understand. Obviously, being the world’s most successful investor,there is wisdom in what he says.


#5. Not getting the basic difference between Saving and Investments


Many investors do not understand this basic principle. Getting this right is one of the key principles to wealth generation.

Savingis when you try to build funds for some needs, like maybe purchasing a house or going for overseas vacation. Once the adequate target is achieved, you withdraw the whole amount (Capital engaged + Income generated from the capital involved), and then spend it. Then you have nothing left and the process of investment needs to begin all over again.

For building wealth, the above strategy does not work. This is where the process of investment needs to be understood. (This strategy is similar to preached by worlds famous investors like Benjamin Graham, Phil Fisher, and Warren Buffet etc.)

Investmentis when you try to build funds with the help of assets which in turn also produce income year after year. In this you invest in assets like shares and property. The income generated can be taken out whenever needed or reinvested. However themajor portion of the capital stays put. It stays there to keep growing and compounding which in turn producing more and more income every year.

This process will take a lot of time. It requiressolid discipline and immense patience. However , as the years go by , the additional income stream from investments can supplement your earning potential to a large extent.

To be contd Part III. You can read part III of the series here. Click here for Part III

Costly Investment mistakes to avoid at all costs – Part I

Costly Investment mistakes to avoid at all costs , Investment Planning Tips, Financial Planning, Stocks, Mutual Funds Investing, Life Planning, Goal Oriented Planning.

Life can only be understood backwards; but it must be lived forwards.

In the process of investing, one often makes mistakes. There is nothing wrong in it. However, repeating the same mistakes should be avoided. This is so much easier said then done. Never-the-less, we can always try. So, Here are some of the most common investing mistakes which investors generally make and some of which even I had made in the earlier part of my investment years.

I have been investing since 1997. Earlier part of the investment was when I was in US and then later after moving to India in 2005. I have been investing in both shares and real estate.

Of course, learning from the mistakes, continually, the investing experience has truly been rewarding experience. You can also cultivate good habits of investing by avoiding the following most common mistakes.

So here goes……..

#1. Investing without a Goal

If one does not know to which port he is sailing, no wind is favorable.

Beginning investors often begin by Casual Investing without any goals. This quite often leads to pain and heartburn because, without any goals, investments are treated as speculation instruments solely aimed at making more money in a shorter span of time, by chasing market performance and acting on market swings, something similar to get-rich-quick scheme. (Speculation is a different ball game and of course, many people do succeed at it. However as in Investments, there are different set of rules, full time efforts, and a different mind set and discipline which needs to be followed.).

Different goals require different strategies. Broadly goals can be divided into three types according to time frames.

Long term Goals– typically 7+ years (e.g.: retirement corpus, child education, child marriage etc.) should invest in Long term high risk/high return growth investment assets.

Medium term goal– typically 2 – 7 yrs (e.g.: deposit on house, planning a sabbatical from work etc.)  Require balanced risk investment strategy,

Short term goals– typically less than 2 yrs (e.g.: overseas holiday, purchase of car, any major house improvement expense etc) require conservative investment strategy.

So, Some of the following questions have to worked upon and answered to full satisfaction before setting out for investment: What am I investing for (Goal)? How much do I need for the goal to be met? What is the time frame of the investment going to be? Where do I need to invest? Should I do lump sum investment or Periodic investment? And so on…

Remember, failing to plan is planning to fail

#2. Not Starting to invest Early enough

This is one of the most common mistakes made by investors. Most of us keep waiting for the right time, or the right price, or the right time to begin investing. Remember, Time in the market and not timing the market is the simple way to success in investing. Please read my earlier post on Invest early, Invest Wise, Utilize the power of compounding.

#3. Emotional Investing , being short -sighted, falling to greed and fear, Not following the Investment Plan

A wise man should have money in his head, but not in his heart. –Jonathan Swift

Investing is a long term deliberate process. Long term investment strategy may not make you super rich overnight, but it will not make you a pauper either.

Getting emotionally involved with the portfolio movement is another mistake committed by many. Becoming greedy when markets rise or fearful when markets drop.Paper Money plays on emotions. Investors begin to time the market. Emotional buying and selling of shares based on sentiments often leads to selling low when market sentiments are bearish OR buying high when market sentiments are bullish.

This often results in additional costs, lost opportunities. And of course, if at all the investment was to meet some goals, and then all of that goes for a toss.

To be contd………. Part II. You can read Part II of this series here. (Costly Investment mistakes to avoid at all costs – Part II)