Fortune Watch

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A remarkable number of investors are deeply concerned about the size of the company to invest in. Unfortunately, unlike some other kinds of prejudices, not having a prejudice about size is not good. Let me explain. A few days ago I was talking to (or rather, I was being talked to) by a group of very enthusiastic investors. These were people who had dropped in to extract investment advice from me, despite my strong protestations that I had no advice to offer about any specific stocks.

However, it did not really matter because what they were interested in was displaying the high quality of the research that their brokers had provided them with. This research consisted, in its entirety, of a list of stocks that were about to go up. No actual reasoning and logic accompanied the list. In the olden days of the stock markets, this kind of research went under the term ‘tips’ but it has been re branded now

Anyway, one of things that struck me about the research-led investment strategies that they were discussing was the utter lack of any consideration for size. They consider the stock of a large company, with a high market value, and that of a company with a lower market value as alternatives to each other. This is so because the ‘research’ they are going by says that all these are likely to rise. This is deeply misguided way of evaluating stocks.

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For religious reasons, Islamic mutual funds shun nearly half of the stocks in the market, yet they still are among the top-performing U.S. funds. With Annual Growth rate of 15% and more in the recent years, the Islamic banking and Investment Industry ranks as one of the faster growing segments of the world’s financial services industry.

Estimates of the total value of assets managed according to Shari’a-compliant principles range as high as $750 billion, in other words Islamic finance is now a worldwide phenomenon.

The Islamic funds market has developed at a slower pace, but its potential is clearly huge. There are now more than 400 Islamic funds – four times the number at the turn of the century.

On the whole, the performance of Equity funds has been positive. Studies have shown that excluding financials, defense, tobacco, alcohol, leisure and entertainment stocks – as these funds must do if they are to remain Shari’a compliant - is no big disadvantage. The range of asset classes has mushroomed; a few hedge funds have also been launched.

The pace of product innovation has picked up in recent years; there are now a number of multi manager products on the market. Unit linked savings and retirement plans began to emerge few years ago, but the market is expanding fast and as many as 39 Banks have applied to distribute insurance in Saudi Arabia alone.

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Many years back an elderly relative of a family friend of mine passed away. The next day, while I was at the funeral, I had a really strange experience. I noticed that a man who looked really stricken with grief was continuously staring at me, I vaguely remembered seeing him somewhere too. A few minutes later, he left the group of people he was with and came and stood next to me.

“I‘ve seen you at so and so office, you are the guy who talks Financial Services, am I correct?” he whispered. I nodded, not knowing whether I was expected to carry on a conversation. And then, having surreptitiously glanced around to make sure no one was listening, he whispered again, “Is the market going to go up?”

“I don’t know,” I said. It was an honest answer because I never do know what’s going to happen to the markets (nor, do I think does anyone else but that’s not the point). The man looked hurt and angry, perhaps because he felt that I should have done my bit to lighten his sorrow by predicting the future direction of the stock market. Once he realized that I was too heartless to oblige, he stalked off and kept glaring at me till I left.

Later, I couldn’t help thinking about this incident and wonder at the vast range of attention levels that people pay to investing. I’m not talking about those who have a legitimate professional connection with the markets like investment managers, family astrologers of stockbrokers and perhaps even editors of mutual fund magazines. I am talking instead of ordinary people who have a non-financial profession.

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Stick to the rules. Believe it or not this is the hardest rule. The trader will keep breaking this one time and time again. As I have mentioned many times, every time that I have strayed away from my trading plan I have always lost money.

Diversify. Don’t have all your eggs in one basket. Buy from a couple of areas, not just the one sector.

Buy shares that suit your trading style. If you are buying shares for long term, obviously this won’t suit you if you are a short-term trader. And vice versa, shares for short term won’t suit if you are a medium to long term trader.

Know your risk tolerance. A speculative share has a different risk profile to an out-of-favor blue chip. Therefore allocate your capital according to the risk profile of the trade and your own personal risk tolerance. This is a personal decision that only you can make.

Don’t rush in. All investor’s particularly new ones should take their time and learn about the market before they start trading. A good way is to “dummy trade” first so as so as to learn the basics first. The market will still be there waiting for you for when you are ready to trade.

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Once again, investors are in a manic-depressive mood. They undergo bouts of wild joy when they see where the markets are heading and how the value of their investments has increased. At the same time, they are sick with worry about whether they should stay invested and whether they should invest more.

The stock markets have reached higher than they have ever done before. This is a good thing for investors but is also a dangerous one. Remember, more bad investment decisions are made when the markets are at a high than at any other time. All-time highs may be exciting, but all savvy investors know that at times like these one’s thoughts should be on what not to do rather than on what to do.

We know it’s difficult to control one’s excitement, but this is the right time to get back to basics and reaffirm one’s knowledge and faith in the basics of investing. Here are some simple rules and principles that will ensure that you can prevent yourself from making the worse mistakes that the stratospheric heights of the stock markets can induce.

1. It isn’t different this time, not really:
Every bull run brings out the chronic optimist in investors. This time, we feel, things have changed fundamentally and the markets will go on rising up for a long time. Sure, we feel, they may pause a bit, but surely they won’t fall ever again. Every great bull run that the Indian markets have seen in living memory has come complete with a set of reasons ‘proving’ why it was different this time.

2. Bulls are no substitute for knowledge and understanding:
As the stock markets rise, most people appear to need fewer and fewer justifications for investing. A couple of years ago, when the markets were down in the dumps, hardly anyone would make an investment without putting it under a magnifying glass.

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Greed and fear are the major players in the stock market. These two emotions are the driving force behind almost all market participants - Institutional mangers, stockbrokers, Investors, traders and yourself.

You might be saying to yourself that greed and fear will never get in the way of my trading, but believe it or not they will be. It is not something to be ashamed of. It is something you have to admit to, come face to face with, If you are to become a successful stock trader or investor.

What do greed and fear look like in the stock market trading arena? “We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.” Warren Buffet

Fear doesn’t form in a vacuum. It is a learned response to a particular event or probability. In the case of trading, when you have a trade that goes bad, the regret and frustration can carry over into the NEXT trade. Or worse, the fear is so consuming, that you don’t enter your next trade. This particular problem is fueled by the expectation that every trade you enter should be profitable. If you truly believe that, then here is an important piece of information for you - not every trade will be profitable!

Greed creates the opposite problem. With a couple of consecutive winning trades, the ego can enlarge and feeling invincible overcomes being logical. This will ultimately lead you to trades that you normally would not have entered.

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Although we don’t like to admit it, fear can often motivate our investment decisions. That’s understandable — the thought of losing even a portion of your savings can be scary. But unfortunately, fear can distort reason and sound analysis, causing investors to ignore both risks and opportunities of investing. It can also lead to “financial paralysis” — when an investor is so afraid of making the wrong decisions, they fail to make any decisions at all.

On Tuesday, February 27 this year, the Dow Jones Industrial Average dropped 416 points—the markets sharpest drop in three years. Two emotions—fear and greed—can lead to bad investment decisions

Here are some quick tips to help overcome anxiety and fear, and allow you to take control of your investment future.

Investing can be dangerous yet profitable endeavor. Many people have been burnt and decide not to ever invest again. This is the primary fear for investing in anything. They may give you excuse such as ‘I don’t have enough money’ or ‘I don’t know where to invest’. But the number one fear is always the fear of losing money. If a novice investor knows that he won’t lose money, he must have used all means necessary (such as loan) to buy as much investment opportunity possible.

Investing here can mean a lot of things from buying gold coin to real estate. There are several ways of how to reduce your fear of investing in common stock.

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I see a parallel here between medical treatment and investment advice. In both cases, the choice of expert is an extremely high-stakes decision. If your doctor prescribes the wrong course of treatment, you may not wake up the next day. An incompetent investment adviser may leave you unable to ever retire.

Investing to a lot of people is comparable to going to the doctor, you know you should but it’s kind of scary, so you put it off. Does that sound familiar at all? Well, the thought that should be even scarier is what may happen if you don’t start investing.

One of the biggest misconceptions about investing, whether it is the stock market, bonds, real estate is that you have to have a lot of money to do it, and you only do it so you can get rich. The truth is completely different.

The truth is, investing is something you do to secure your financial future and also build a retirement fund. Suppose you were downsized out of your job? Suppose your retirement is up in 10 years? By investing, you will be prepared to meet these new challenges.

That’s the real meaning behind investing, planning your retirement, not becoming a millionaire. I’ve found few of the biggest reasons why many people fail to get started investing in their financial future as follows:-

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Losing sleep over buying a mattress could be understandable; people are tossing and turning on potentially bad beds because they dread mattress shopping.

Now let’s take a look at losing sleep while investing. The recent events in the stock and bond markets drew everyone’s attention. No doubt you took a look at your investments and, perhaps, worried about one or two. Maybe, you made some changes to your portfolio.

Let’s take a look at your experience and see if there are some lessons to be learned.

Did you lose sleep, literally or figuratively, over any of your investments? This is the gut check measure of risk tolerance. Investing is not an emotional decision, it takes hard work and discipline, but if you worry too much about an investment, it isn’t right for you. One of the hardest parts of investing is keeping your emotions out of it (i.e., taking a loss or selling your “favorite” stock).

Emotion will only cause you to buy at the market highs and sell at the lows. But, did your gut tell you to sell anything during the recent market correction? Rule number one of gut check investing is: if you lose sleep over an investment, it’s probably too risky for you. How do you know? This brings me to the second rule of gut check investing.

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There are only two emotions in the market - hope and fear.The problem is you hope when you should fear, and you fear when you should hope. Sounds a little too smug, doesn’t it? What exactly does this mean? Loosely, it means that when a stock you are holding goes down, you keep holding it hoping it will rise whereas actually you should fear that it will fall more. And when an investment goes up in value, you do the opposite.

This is true for many of us. But fear and hope aren’t the only two emotions at play in stock investing, there are many more. Here’s the full list: doubt, suspicion, caution, confidence, enthusiasm, greed, indifference, denial, concern, fear, panic and finally, despair. Naturally, greed comes in only when markets are at the top. In the list above, the emotions before greed are the ones that are felt on the way up and the ones after greed are felt on the way down.

That’s why the investment pros often say in a mantra-like tone: “There is no such thing as a free lunch.”

The key to successful investing is not to avoid risk altogether but to recognize the risks you are taking. To avoid unpleasant surprises, do your homework. Nothing beats reading the prospectuses and checking the long-term performances of your investments. People rush into purchases even when they don’t understand what they’re buying, People do more research when they buy a refrigerator or a laptop than when they invest thousands in stock. (more…)