A few mistakes investors make

Friends, professional acquaintances and even patrons at times forward opinions of self-appointed market experts on mobile phone groups and at times even reports from ‘reputed’ brokerage houses suggesting the possibility of raking in abnormal returns. This, to my mind, is the most basic of mistakes investors make, led on by those preying on their naivety and greed.

We are constrained to remind them that if only the art of investing was so easy that one could act on such pearls of wisdom (of which there is no dearth, courtesy the hyper active social media) and profit, then everyone ought to be doubling their wealth monthly. Alas, that must remain a pipe dream. Without getting into the helplessness of the regulator in monitoring the proliferation of blatantly loaded messages by such fly-by-night operators, even as it cracks the whip randomly on largely adherent AMCs and registered intermediaries, it would suffice to say that this is a menace that shows no sign of abating.

Hence, all we can do is remind investors of the Latin phrase, Caveat Emptor - Let the Buyer Beware. Another investor mistake and this is a self-induced one is to forget all about one’s Asset Allocation plan and the need to undertake re-balancing when the markets swing to either extreme. Resultantly, many investors panicked and simply bailed out of their SIPs as well as in certain extreme cases all their equity investments in the month of March this year.

At the worst possible time, mind you. And now, when equities have rebounded sharply, many are resisting the logical act of re-balancing by moving a notch or two lower on the risk ladder even while continuing to ride the tide. No prizes for guessing how this will eventually play out for such investors. Half-baked knowledge based on some random readings is potentially a weapon of wealth destruction in the market. A few years ago, I was bemused once to meet a market participant who flew down from Bangalore to meet me with a portfolio holdings sheet comprising around 350 stocks and mutual funds.

He informed me that he followed some form of ‘beverage can investing’ he had read about and hence had ‘diversified’ his portfolio. Even as I politely informed him that while it was nice meeting him, there was little I could do to help such a ‘learned’ investor, he dropped a bombshell. He informed me that his wife, also an IT professional and avid market buff like him, had a portfolio of around 250 stocks and mutual funds. And while on the point of mutual funds and stocks, there is no dearth of investors that swear they buy only blue-chip stocks and mutual funds.

By blue-chip mutual funds they presumably mean large cap funds as per the regulator’s categorization norms as they stand today. Clearly then, they are duplicating what the fund manager of the mutual fund scheme they have invested in is doing, defeating the very purpose of ‘diversifying’. And then, losing participants often complain that the markets are a harsh place where making money is very difficult. Guess why!

Ashok Kumar
Heads LKW-India and can be reached at ceolotus@hotmail.com