Do you invest for Applause or Returns?

Recently, while waiting at the airport lounge, I had an opportunity to converse with a young man who had an attractive engineering degree from a no. 1 institution in India, and masters done from a top notch business school abroad. While industry experts talk high about the exciting opportunities in the job market, this young man had no job. I was more surprised at his reply that he was not applying for jobs at all as he is waiting for the right opportunity in his dream field which is under ‘emerging sector’ in India. He has also been ignoring suggestions from his friends to join a global company (mentioned the name of the company). When it was time to board the aircraft, we shared our contacts and bid adieu.

Isn’t going with the crowd the safe option?

A response from this young chap propelled me into a deep thought. Many clients raise a query quite often in a similar line while discussing on personal investments. Isn’t going with the popular investment model the safe option?

US House Bubble: Do you remember the US house bubble of mid 2000s? Robert Shiller’s projection of home prices in USA showed an increasing evaluation of property value by 0.4% every year from 1890 to 2004 and created a high demand for real estate in the USA. Banks were offering loans at historically low interest rates. Everyone wanted to own a house and lent huge sums from various banks. A high demand for a real estate and the availability of bank loans at low interest rates resulted in dumping the home owners in negative equity. The mortgage dept went higher than the actual value of their home/property. Those who projected this earlier with the appropriate data calculation escaped brilliantly from the sub-prime crisis.

Do you invest in a scheme because your friend, your colleague, your neighbor or relative is investing or talking high about that particular scheme?

Warren Buffett very aptly quotes, “Beware the investment activity that produces applause; the great moves are usually greeted by yawns”.

ULIP season without any reason: Year of 2007 was the season of ULIPs. Yes, a large insurance company launched a ulip scheme. Group of agents decided to make huge money by misselling the scheme. They have created projections like if you invest Rs.10000 for 3 years, end of 10^th year you will get 3 lacs. Some agents went step ahead and told investors that on 10^th year the investors will get 10 lacs.

If a lie is repeated ‘n’ number of times by ‘n’ number of people it will appear like a truth. Based on this illusion the ulip season made many agents richer and also made them win trips to foreign countries. But now investors realized that they should not have fallen prey for ULIP season. Instead they could have analyzed the reason.

You need to be careful while considering the investment model that gets highly appreciated. When a particular investment strategy is applauded highly, it pre- occupies your mind completely and makes you fall victim for counter-productivity. You miss to analyze the pros and cons or examine the results. Sometimes you tend to choose the model that doesn’t suit your requirement or earnings.

People yawned at the person who discovered and told the earth is round. Investors yawned at warren buffet when he didn’t participate in the tech rally in late 90s. Great ideas will not be appreciated at first, it will be yawned instead.

Also people will appreciate smart investment options, but will yawn at the disciplined investment approach. But disciplined approach pays more than the so called smart investment options.

Scam is the time to be panic or find the opportunity…?

Is the entity if affected by a scam the right time to invest on? The SFIO exposed an accounting fraud of Satyam computers, the then fourth largest IT company of India, in the mid of 2000s. In 2001, by using falsified accounts, the stock price was kept high and Sathyam showed huge investments in the international banks where it actually was starving. Even though the merger happened between Tech Mahindra and Satyam, forecasting the performance of the Mahindra Satyam was not easy. The book value of Satyam was a hyped one and Tech Mahindra was one of the growing IT companies. Rushing to invest on Mahindra Sathyam was considered a bad move then.

Because the entire crowd is panicky and sells the Satyam stocks left, right and center, it really provided an opportunity for the investors who ignore the crowd but do meticulous calculation before taking the right investment decision.

Is approval from the crowd necessary while taking investment decisions?

Do you expect people around should approve your investment decisions? Do you reject an investment because they reject that scheme?

Just listen to the theory of Benjamin Graham, whom Warren Buffet considered as his guru, here. “You are neither right nor wrong because the crowd disagrees with you. You are right because your data and reasoning are right”.

If you are habitual in seeking permission or approval from your circle for taking investment decisions, it is time to change the habit now. If you are not familiar with some business, you do not have to necessary buy stocks from that business. Unless you understand how the business works, you won’t be able to figure out the performance of the model in the future. Just because your friends or some experts say investing in a particular model is the best, do not put your hard earned money on it. You may not be able to understand or follow the course of plan.

Remember, seeking help from your friend who suggested the plan is also not feasible all the time. Likewise, when you have decided a particular model after figuring out various options and analyzing the data, do not step back just because someone is saying it is not good. Narayan Murthy was rejected by Wipro before he started Infosys. If people around you are rejecting some investment option, then it doesn’t mean that it is not a good one.

When I was about to finish this write-up, surprised to receive a call from the young man I met at the airport. Within 2 months of joining his dream job, he had earned 1.2 times compared to what he would have earned in six months if he had joined a company suggested by his friends. Do not wait for an approval from the crowd. Follow your instinct while investing, of course, which is backed up with the right data and reasoning.