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D.Muthukrishnan (Muthu), Certified Financial Planner- Personal Financial Advisor

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Wisely Speaking- 4

Posted by Muthu on January 19, 2012

Benjamin Graham who is considered as father of value investing and security analysis and is also the mentor of Warren Buffet once mentioned:

“A suggestion I can make is that if you were sure that you could follow a dollar-averaging program, you could start [investing] right away. Dollar averaging is a method of investment under which you set aside regularly a fixed amount of money and invest it in common stocks generally, either in a single common stock or preferably in a group investment through investment-company shares. By investing the same amount of money at regular intervals – say, every three months, you get two advantages.

One is that over the years your investment reflects the average market price rather than the high market levels – which is where you are likely to buy if you follow the crowd. Secondly, the arithmetic of dollar averaging gives you more shares at the lower prices than at the higher prices, so that your average cost is lower than the arithmetic average. If you are putting $1,000 in one kind of stock and the price is $10, you’d get 100 shares. If later it’s $20, you’d get 50 shares. You bought more stock at the $10 basis than at $20. Consequently your average price would be less than $15.”

Over the last two decades, I’ve observed that there is a tendency to participate in the markets only when it is rising continuously. Good investments are the ones which are mostly made in bad times than in good times. That is why I always believe in the paradox that bad markets are good for making investments.

What Benjamin Graham has said about investing regularly for a long term works well for a portfolio of stocks like mutual funds or index than an individual stock. By doing this, we are able to avoid one of most fundamental and costly errors in investing; investing money when the markets are high and redeeming or not investing further when the markets are low.

Not only that we get average prices instead of higher prices over the long term, the average price is lesser than arithmetical average because we buy lot more when markets are low and lot less when the markets are high.

Our behaviour and emotional discipline matters most. If this can be absorbed inside the skin, we would do fewer mistakes with our investments.

Early this month, I was chatting with a senior citizen who is in his eighties. He has retired from a private sector company around nearly 3 decades ago and has no pension. He married very late in life and so many of his financial responsibilities came much later in the life. He had done well in discharging his responsibilities without resorting to debt, having an own house and managing his affairs till date without seeking the financial help of his children. Infact he keeps giving his children and gets nothing from them.

What he has done for himself is quiet commendable given his social background. I asked how he is able to do this way. He simply said ‘stock market’. When I probed further, he shared his portfolio with me. I was surprised. It is very high for his background and infact I’ve not seen the same quantum of wealth even with many people having a very high earnings.

He never watches any business channels or read financial newspapers or magazines. He just read the finance page in normal newspaper to have a general understanding of what is happening. He reads the annual report of companies he has invested in and doesn’t tinker his portfolio frequently.

He holds shares in one of the best wealth creator of the last decade. He told me after he purchased this stock in 2000; it fell almost by 50%. He reasoned that if something was good at Rs.X, it is all the more better buy at Rs.0.5X. So he doubled his quantity when the price fell by half.

He does not have the knowledge of many of the professors in finance, investment and security analysis. He may even feel that something is wrong with his approach if these gentlemen start taking class and talk about efficient market hypothesis, beta, alpha, hedging strategies etc. But he can be rest assured that with out their jobs, many of these professors may not be able to survive leave alone thrive. Whereas this person, with his understanding and approach, has thrived without a great job or handsome income.

In early 2000 when I was exposed to writings of Warren Buffett, an elderly gentleman used to do some assignments on a freelance basis in the organization I worked. Sensing his interest in markets, I used to talk to him enthusiastically about Buffett. The subsequent two years was a strong bear market due to dot com burst, twin tower attack etc. He taught me about picking stocks for long term, how to analyze a company etc. Again this gentleman also had a career in the capacity of junior management employee in a private company. He used to share his portfolio which he has been building for decades. If my memory serves me right, his portfolio was worth couple of crores then, a big amount for anybody even today; much higher a decade ago both on absolute terms and more so given his career and income levels.

His kinds are the ones who make good money in stock markets in the long run. In the last 3 decades+, when Sensex has given an annualized return of around 17%, people with this attitude would be the ones who would have made money. People, who buy in bull markets and sell in bear markets or stop buying in bear markets, don’t get benefited by the market. It is not the mistake of the market; it is our emotional instability and lack of discipline which prevents us from making wealth which markets are capable of offering.

I’m not a ‘suyambu’. I’ve done lot of mistakes earlier and do lesser mistakes now. However in addition to learning from Buffett,  Graham etc.; I’ve met good investors who have made wealth absolutely disproportionate to their income; through ethical and legal means, by investing in markets. I’ve met people who have been staying invested in good equity funds for more than a decade and reaping an annualized return of even 20%+.

Like Buffett says for the snow ball to become big, the slope has to be long. I can say with fair degree of conviction if I live long and mental faculties remain intact, making a sizeable snow ball isn’t that difficult.

When I was talking to a friend in business media last week, I told him that no one would have ever made money by following their recommendations. Newspapers and TV channels keeps recommending doing something everyday and magazines on a weekly or fortnightly basis:-). There is no point in blaming them. When we perceive value only through activities and like to be entertained, media do their part. It is the question of what entertain us- sports, cinema, religion, music, history, adventure or stock markets. For every need, there is supply available. The problem in investing arises only if you start taking everything in the entertainment seriously.

Entertainment, by its very nature, cannot be monotonous. It has to be different everyday. There has to be villain- be it FII or RBI or Government or Europe or USA. It needs to create fear and make us jittery; create enthusiasm and make us jump with excitement. All these are absolutely fine if you do not make decisions on investments or personal finance solely on this. If you cannot avoid getting impulsive by this entertainment; then better to avoid it all together. Otherwise our life becomes a most tragic entertainment:-)

I’m not against acquiring knowledge or educating oneself. I do it all the time. But this is of no use if there is impulsive behaviour and zero emotional discipline. It is unfortunate some of the very intelligent people I know easily succumb to noise around them created by media. There is an information and opinion overload. In the web world, everyone including me is a philosopher and a genius:-)

Because of human nature and behaviour, only a small percentage of people in the markets can reap the benefits it can offer. I feel it would always be so, because influencing the behaviour, even that of our own is the most difficult thing. I’m trying to see if majority of our clients can be part of this minority club. If it happens, the credit goes fully to you.

Not that we are good in forecasting. Nobody is. We do not even believe in forecasting, especially short term. However based on certain observations and trends, we’ve been pointing out for some time the possibility of interest rates peaking out, inflation coming down and rate cuts start happening. The first two has already happened and as for the last one we feel it is not the question of whether but when. We too get it right, at times:-)

Though 2011 has been second worst year (the other one being 2008) in our stock markets in nearly two decades, we attracted good amount of FDI. FDI is sticky and long term investments when compared to FIIs. This has not been highlighted.

With the present growth rate itself, we are projected to be the 5th largest economy in the world by 2020. I believe that if the government gets the infrastructure story right, even double digit growth rate us is very much possible. Keeping in mind long term bigger picture helps us not to be distracted by day to day news flows.

As far as rupee movement goes, though many variables influence this, given our economic growth rate and possible capital inflows from overseas, in the longer run the way forward looks like strengthening of the rupee.

In markets, they use two terms ‘time correction’ and ‘price correction’. It so happened that our markets are still lower than where we were in January 2008. Both in terms of time and price, the correction has been there for the last 4 years. So there is a strong possibility that the coming years would take our markets to the next level as the earnings have not stopped growing during the last 4 years and they always command a better multiple in bull markets.

Never forget the cyclical nature of the market. We may have a fresh top and bottom at the next level.  But when the market moves to the next level; so do our wealth.

When the interest rate starts falling down and equity markets starts picking up, MIPs are capable of doing very well. For this debt oriented hybrid plans, next few years may be rewarding.

It’s a good time to weed out poor equity funds and stocks and move into better ones.  As far as funds are concerned, we can help you and you’ve to take your own call on stocks.

Irrespective of market conditions, always continue your SIPs and whenever your financial situation permits, make it a point increase the monthly commitment. You would definitely be very happy about your decision in the long run.

3 Responses to “Wisely Speaking- 4”

  1. Wonderful informative article…Any common man reading this can understand it as he can correlate it with himself and his way of investment…This is an eye opener in many terms…Good work Ji!!!

  2. A really enlightening article to say the least. An average investor should understand that it is not worthwhile to try an time the markets. We did a primitive analysis and found that there is no significant difference in return earned by a perfect timing investor and an indifferent investor (Read more at http://www.stableinvestor.com/2011/12/timing-markets-or-disciplined-investing.html)
    Adding your online presence to our Blogroll.

  3. rajapanda said

    The story of two gentleman is really interesting and inspiring and aspiring.

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