Fortune Watch

“People who read Cosmopolitan magazine are very different from those who do not.” so said Donald Berry in ‘Statistics’.

Now you will just not have any idea of how apt that statement is unless you’ve actually read Cosmopolitan (really read it, not just look at the pictures) but I like to believe that fund investors who read Mutual Fund Insight are very different from those who don’t. I have believed so far that there are two kinds of fund investors-thinking ones and non-thinking ones. And those who invest their time and money in reading this magazine must be the thinking ones.

What distinguishes the two? The non-thinking ones are the ones who just follow whatever seems to be the flavor of the day. The thinking ones are those who carefully weigh their options, consider the facts and then take rational decisions. However, in recent months I have seen that sometimes, the final step is the same.

The non-thinking ones unthinkingly follow the flavor of the day. The thinking ones think carefully, then just ignore the conclusions and follow the flavor of the day. They look at returns, ratings, portfolio statistics and whatnot, but then turn around and invest purely driven by the fear of getting left behind by everyone else.

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What do you say? Doesn’t every investor want to own great stocks? Of course they do and so do you, but the “great stocks” I’m talking about are usually the ones a well-meaning neighbor or co-worker tips you off to as the next Microsoft or whatever.

Usually these stocks fall into three categories:

Ornaments – all shiny on the outside, but hollow and easily broken at the slightest touch. They capture the attention of investors easily distracted from sound investing principles with their glitter, but ultimately fail because they are not viable businesses. In six months, no one will remember its name.

Bicycle – What your friend doesn’t realize is that this stock is tied to an economic cycle which is about to swing in the opposite direction.. She bought the stock when demand was high and the stock was fat, things are going to change soon and the tires are going flat.

Great but late – Your friend is right about the stock, it is great. Unfortunately, the market has bid up the price past the point where you can realistically expect to make any money. This is the “buying high” part of the equation that results in losses (buy high – sell low).
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I am a bit of a gambler but am not the normal type of punter who you may see in the bookmakers on a Saturday afternoon. I am the kind of gambler who only likes to bet on what you might call a racing certainty. I love the thrill of all things to do with gambling but in my opinion there is nothing better than riding the stock market wave. What I mean by this is attempting to make money from investing in stocks and shares, trying to predict when to buy and sell etc. In this article I will write about the reasons why I believe more people should invest on the stock market.

Some people avoid the stock market because “it’s too risky.” But it can be riskier to not invest. If you put all your savings under your mattress, it probably won’t be enough to sustain you in retirement. If it’s all in a bank account earning 3% per year, on average, then that will barely keep up with inflation, at most. You can do better than that.

Many reasons for many people to do investments, one that can be very common to most of us is to make money. There are also personal reasons that you’ll want to start or join an investment club. You’ll finally have the opportunity to play the stock market in a safe environment that may be low risk and lets you learn more about a subject that greatly interests you.
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The soap company’s marketing head is taking the CEO through the plans for the new product launch. He shows the big boss two versions of the new soap, one that costs $10 and one $20. When the CEO asks, “What’s the difference?” the marketing whiz replies, “No difference, sir, some people like to pay ten, some like to pay twenty.” I was reminded of this ancient joke while I was talking to an acquaintance of mine whose job it is to sell investment products to very rich people in a part of the world that is exceptionally well-endowed with such people. My friend was extolling the virtues of ‘high-end’ portfolio management type of products, which I have never thought to be a good way to invest. “You don’t understand how the really rich think. They want exclusivity. These guys already have all the money they need – what they want is an investment product that is made specifically for them.”

This really struck a chord in mind, more so because, as it happens, I have with me a great deal of first-hand information about the performance of Portfolio Management Schemes. Over the last few months a lot of people have gotten in touch with me complaining about how they’re making less money in these schemes than they would have made had they invested even in average equity funds.

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Approximately eighty percent of our investors are male. But I am willing to bet that eighty percent of the most successful investors are women.I have read many stories and I began to wonder why is it that women tend to be better investors than men. I thought about it over and over, and I could not ignore the facts that women make more successful investors than men.

While this recent research shows that potentially women are naturally talented investors, many are still put off by the macho image of the stock market. Men tend to let their egos make their decisions for them. They hold when they should sell and vice versa. They buy in for fear of missing out on that one big opportunity. They refuse to ask questions or to ask for help in fear of looking silly.

In other words, men are more interested in looking strong, knowledgeable or successful than they are in making money. They invest not to get the best deal out of the market but invest so that they look good.

Women on the other hand, are much more likely to ask questions until they fully understand what they are learning, and they are usually more interested in the goal, (in this case making money) than they are in impressing the people around them.

This quality makes women great investors from all that I have read are that rather than investing according to what will make them look good, women will invest according to a plan—not according to what mood they are in or whether they will be “right” or “wrong”.

Investing is not about being right or wrong. It’s about making money. Women are able to put their egos aside in ways men have trouble doing. This ability to set their ego aside makes women great investors. Need proof?

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As a Financial Planner, I get emails from people who want investment advice. Much of this is not about comprehensive advice but rather; just single questions that are bothering people. This is very useful in my work because one can often spot interesting trends in the questions that people ask.

Over the last few months, I have noticed that an increasing number of people are worried about whether they are ‘managing’ their investments properly. Clearly, the idea is afoot that investments need to be managed. And the genesis of this idea is also clear from some of the email. Sometimes, people ask specifically whether the X investment management plan from Y Bank is better than the A plan from B Financial Services Company. Mind you, most of these are not what are normally called Portfolio Management Schemes. Instead, this is plain old fund sales; dressed up in a brand to look like customized investment management.

Earlier, someone from a fund distribution outfit would contact you, ask a few questions and sell you a bunch of funds, good or bad. Now, his actual actions will be the same but he’ll claim that your fund investments are being managed as part of his bank’s plan, which he claims better than the other bank’s plan.

Now, this branding does not do investors any real harm because it’s just a routine sales stunt of the kind that infests practically every product or service nowadays. However, I get the clear feeling that the kind of sales pitch that is given with these plans is leaving many investors with a certain anxiety. To sell funds dressed up as management plans, investors are told that managing investing is a very complicated activity that requires continuous management. Most investors swallow this line and then start worrying about whether they are managing their investments correctly.

In reality, investment management is an activity that can be as simple as you want it to be.

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There seems to be a school of thought around that the stock markets must run in such a way that the so-called retail investor must always make money and if he doesn’t, then there’s something wrong. Either the laws are inadequate or the markets are crooked, or preferably, both. The belief that the retail investor (formerly called the small investor) has a right to make profits no matter what he does is shared by some in the investment community, the media and in the government. There are frequent lamentations about the fact that the retail investor is not participating in the markets and various remedies are suggested (and some implemented) to correct this supposed anomaly.

Am I saying that no individual should invest directly in stocks at all? After all, expert investors too start out as individuals investing for themselves. The way it happens is that a large number of investors try their hand at the markets, usually when the markets are booming. As long as the markets stay strong they all make money, more or less.

This makes them confident so that when the bulls stop running, most of them lose heavily. Some, however, turn out to have the right mental make-up for this activity and go on to become experts. There is nothing wrong with this. Markets are inherently Darwinian by their nature that those who make the wrong choices will lose. For a market to function correctly, those who make the right choices must make money those who make the wrong choices must bear losses. If we see this as a problem and try and fix things, we will actually end up breaking them.

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Investing is so fascinating because it’s just as much about people and their emotions as it is about the raw numbers. Sure over the shorter period – and especially over the past 4 years – everyone’s an expert. It’s critical that ALL investors have a sound investment process.

It’s good to be confident, or so all of us were told when we were young. Confidence will make whatever you want achievable. So it must be very good that I’ve been meeting a lot of very confident investors these days. I met a man who started investing in stocks only three months ago and whose investments have returned more than 25 per cent during this period. That’s an annualized return of more than a 100 per cent a year, as he proudly-and accurately-informed me. Someone else I ran into started investing in February 2004 and have more than doubled his money. He has made a very confident projection that showed how fabulously rich he was likely to be in about five years’ time.

Of course, this is not just amateur hour-professional investors too are sounding like the gentlemen above. I met the marketing chief of a mutual fund company who had many megabytes of marvelously entertaining PowerPoint slides about how his fund managers had generated great returns over the last three years. I did ask him about what their returns had been like before that but the response I got made me feel that I had said something very rude.

Welcome to the land of investing geniuses, no one in this world has made any mistake on the stock market for as long as they can remember.

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The pain of investors is enormous. People have lost a lot of money and not only are the losses continuing, but it’s clear to me that they are going to continue. What is worse is that the boom and the hype around it evolved in such a way that the worst pain is faced by those who are least prepared for it.

The worst real losses are those of investors who got attracted to the stock markets around the time when the markets were booming. Typically, these people have made a series of bad choices. Instead of investing steadily, they have put in large chunks of money at one go. Their mutual fund investments are in untested new funds and their stock investments are in rumor-of-the-day type of stocks that were being pushed by brokers. The more recklessly adventurous have already lost large chunks of their investments to repeated margin calls from brokers and lenders.

Of course, the question that everyone is asking is when will the markets turn upwards and resume what we’ve come to believe is their normal course. After all, as the logic goes, there is nothing wrong with fundamentals. Firstly, the fundamentals corporate’ financial future are somewhat less rosy than the general hype would have us believe. The rising cost of money and distortions produced by the huge liquidity glut are a serious issue.

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Personally, I’ve never had much respect for the stock market. In fact, on some days, the news of the stock markets are the chief source of amusement that I and some colleagues of mine have. I hardly ever pay any attention to the Stock Indexes except when I am feeling bored. When I feel the need for some light relief, some of us open the day’s live Dow Jones graph on finance, point it out to each other and laugh heartily, as if it were some great joke. We never feel there’s anything strange about this behaviour except when we end up doing this in front of a visitor who, in turn, starts looking at us as if there is something strange about our behavior.

Now I know this sounds heretical coming from someone whose vocation appears to be linked to the stock market, but I really do feel that there is something funny about the daily curve of the stock market graph. Or more precisely, about the deep meaning that so many people are trying to derive from it.

Am I saying that the stock market is a meaningless circus then? No, far from it. The stock market, along with the stock prices of all listed companies and the levels of the various indices are extremely important to the countries and to many of us’ economic well-being. What is a meaningless circus is the minute-to-minute hyperventilate tracking of these things. Let me explain it this way. Tracking and predicting the weather is an important function but lying on the ground and trying to draw meaning from the changing shapes of clouds being chased by the wind is madness.

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