Beware of framing, as it affects behavior

Is the glass half-full or is it half-empty? We have grown up with this question. It is said that an optimist sees the glass half-full, whereas a pessimist sees it otherwise.

However, look at the other way. Instead of just seeing the glass, what would happen if you have to explain about this point on optimism/pessimism to someone? Psychologists have done various experiments on questions similar to this and concluded that the way you present a message can change its interpretation.

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What you need to invst in equity markets - well, apart from money, time and knowledge ...

Below is the link to one of my old articles - published in Mumbai Samachar

http://www.bombaysamachar.com/frmStoryShow.aspx?sNo=29199

The English translation is as under:

Mental fitness

Last week when the Sensex made a two-year low, I received a sarcastic SMS from a friend: “New SEBI rule from today: If you want to trade in stock markets or the derivatives markets, additional documents must be submitted along with your PAN card and KYC documents. These new documents include cardiograph, your blood pressure readings and fitness certificate from a doctor.”

This conveys the amount of stress that the stock market movements can cause to common men.  Money has a profound impact on our mental state.

I have always wondered: I thought we invest our money to get peace of mind, but one has seen many losing the peace of mind after investing. In fact, there have been cases of suicide linked to losses incurred in the stock and derivatives markets. This is very disturbing. Why should someone get into something that leads to such a tragic end?

Does it mean stock markets are bad? No, not really. It is like railway tracks. There have been many cases of people losing lives while crossing railway tracks instead of using the foot over bridge. Does it mean railway tracks are bad?

In majority of such cases, the mechanism – be it stock markets or railway tracks – are made for certain purpose. If one misuses the system, one should be ready to pay for the consequences.

The other day, one gentleman was talking to his friends about the stock markets and compared the stock market with a casino. Very often, such phrases are used only because there are some misunderstandings prevailing about the stock markets.

So let us understand what exactly is the function of the stock market. As the name suggests, it is a marketplace where buyers and sellers meet and exchange their stocks or money. The stock market’s function is to provide a platform where such transactions happen smoothly and very efficiently, at the same time keeping the transaction costs as low as possible. Once such a platform is available, the stock market is neutral. It does not know or care how one uses this facility. It is available for the transactions.

Whether someone buys it cheap or costly; whether someone sells it cheap or costly – the market is neutral. It does not care at what price the transaction happens since it allows each individual to take a decision to buy or sell at the prevailing price. The transaction price is arrived at jointly by all the participants and is a function of the demand-supply situation. The market does not determine the transaction price.

The demand-supply situation is a function of the information processed by the various buyers and sellers. This is where the responsibility of proper assessment of information lies with the person who transacts.

The stock market provides a platform for the transaction and ensures that the cost of transaction remains low.

One would be better off treating the market only as a market – a place for carrying out the transactions. Why one is selling or buying depends on an individual’s view on the particular security.

We come back to the initial paragraphs. If we understand the function of the market, it means that the responsibility of the decision and its consequences lies only with us. Taking these decisions requires mental toughness since at any time, there will be people who have different views – some optimistic and some pessimistic. The success in investing comes when one can take decisions with a calm state of mind. To get a better perspective, please read the story of “Mr. Market” from the book “Intelligent Investor” by Benjamin Graham.

Hence, I would make a simple change in the SMS we spoke about in the first paragraph: One does not need a cardiograph or blood pressure report; one needs a mental fitness certificate. One needs to develop better abilities to take proper decisions to succeed in the world of investing.

Happy investing!

Amit Trivedi

The author runs Karmayog Knowledge Academy. The views expressed are his personal views. He can be reached at amit@karmayog-knowledge.com.

Amit has authored a book "Riding The Roller Coaster - Lessons from financial market cycles we repeatedly forget. The book is available in two languages - English and Gujarati.

Blog for the book - Riding The Roller Coaster

Have you subscribed to the book's blog yet? There are many interesting posts already there.

Rising The Roller Coaster - Lessons from financial market cycles we repeatedly forget

On herd mentality ...

Don't follow the herd - Think rational We being social animals have a tendency to follow what our peers do. Hence during uncertain times we tend to take haphazard investment decision which we regret later. To avoid such situation and make the most from our portfolio it is important to think rationally and make prudent decision, reckons Amit Trivedi

Read more at: http://www.moneycontrol.com/news/mf-experts/dont-followherd-think-rational_711454.html?utm_source=ref_article



Also read how investors queue up to invest in IPOs ... Investing in IPO and herd mentality

This is how CY2016 will pan out

Many experts attempt to predict future course of action in financial markets. However, seldom one gets most of this predictions right. It makes more sense to position yourself to benefit from various developments in the financial markets than trying to predict the financial markets.

To read more click here

Trust, but verify

In financial transactions, the mantra is: "trust, but verify".

Read my article here



The English translation is as under:

The other day, I was talking to an investment advisor. He was very excited about the trust he has won from his clients. He claimed that he was so much trusted by his clients that they give him signed demat account slips and mutual fund transaction forms.

I asked if the client would ever give blank signed cheques to the same advisor. He laughed it off. Nobody in one’s right mind would ever give blank cheques.

So often, people consider this argument of comparing blank cheques with signed demat slips as ridiculous and laugh it off. While giving someone a blank cheque is accepted as a huge risk, giving a blank signed demat slip is not.

So let us understand what all can happen if you give signed blank demat slip to someone. You are letting the person fill in the details without your knowledge, yet legally you have approved whatever he writes on the slip. This “whatever” means that he can transfer the securities from your demat account to his personal account or anybody else’s account. If it comes to your notice, one can argue that it was just a mistake and he can return the securities in your account.

One has also come across cases where the investor lets the securities remain in the broker’s pool account. When the investor was suggested not to do so, he came up with arguments: (i) it is convenient; (ii) he wanted to avoid the transfer charges. The convenience argument also appeared in case of giving signed but blank demat transaction slips.

So often, we seek to avoid minor inconveniences and fall in a major trap.

In both the above cases, one is offering an opportunity to someone to defraud. Are we suggesting that you should not trust anyone? Well, we cannot. It is one’s choice to decide whom to trust and whom not to. However, we would only like to ask one question, “What is the priority – safety or convenience?” And then to what extent do we want to compromise one for the other?

This is not just about demat accounts. There have been many instances of defrauding innocent investors by conmen. Some have collected cash from investors for depositing in the post office schemes. The amount never reached the post office.

Majority of the frauds have this pattern in common. It all starts with convenience and the same is given the name of trust. Convenience is the primary objective. The conman pretends to be trustworthy and sells the convenience part. He keeps both the decisions and custody of assets with him. The custody is kept in form of the transaction slips in the above example. If someone has the authority to take decisions and also controls the transaction related documents, it becomes easy to commit fraud.

Trusting someone is not bad, as we have already mentioned earlier. However, once convenience becomes a habit, it takes a painful experience to once again get trust on priority.

Mutual funds are a bit different. When redemption is filed in a mutual fund scheme, the proceeds would only go to the investor’s bank account registered with the mutual fund folio. Mutual funds have built this safety mechanism in place and hence they do not issue cheques to third party.

For all other investment avenues, please insist on transfer of all the money only through the banking channel. Else deal through mutual funds, which do not accept cash beyond Rs. 20,000 and always pay the redemption proceeds and dividends in the registered bank accounts.

An investor would be better off being objective in deciding the trust v/s convenience equation. It is better to decide whom to trust and why. Even after that, it is good to take stock of the situation once in a while. Blind trust may not always be desirable. The mantra to remember should be, “Trust, but verify”.

Wish you a very happy 2016!

-        Amit Trivedi

The author runs Karmayog Knowledge Academy. Recently, Amit has authored a book titled “Riding the Roller Coaster – Lessons from Financial Market Cycles We Repeatedly Forget”. The views expressed are his personal opinions.

How to maximize your wealth?

Most individuals prefer to keep looking for the highest returns offering investment. However, the return is not in our control. It makes sense to work on things that are in our control.

Click here to read further ...

Santa Claus is coming along ...

A couple of years ago, I wrote an article around Christmas time. We tend to be stuck so much to the calendar that many of our discussions are about dates, months or periodic events like Diwali or Christmas. We tend to assume that the market also celebrates all our festivals. In this context, I came across a term "Santa Claus rally" while surfing through the net.

Here is my take on it. Click here to read further ...

Tame the volatility of equity markets with asset allocation

Equity markets are volatile. They have always been volatile. They will remain volatile. In fact, all asset classes exhibit price volatility as long as there are trades happening in open markets involving  so many market participants.

One of the ways to tame this volatility is to know how you invest. Click on the link below to read further ...

Tame the volatility of equity markets with asset allocation

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The English translation is as under:

Last time we wrote about the power of SIP to tame the risk of price volatility. However, this is suitable for individuals having regular income and savings. Someone may wonder, what about those who do not have regular savings? What about the retired investors?

Retired investors invest their money and then draw regularly out of these investments. Many are comfortable with fixed income investments and get the regular income in form of interest. On the other hand, there are some who invest in mutual funds and withdraw their money regularly. At the same time, in case of some, they may have money that may remain invested without any withdrawal from the same.

In fact, it is not just retired investors; many investors from other categories have some money that need to be untouched. No income may also be required out of the same as some other investments may be generating enough.

If such money is going to remain invested for long periods of time, one need to find how much should be invested in the volatile asset class called equity and how much in safe fixed income investments. This process is popularly known as asset allocation. (Asset allocation may involve investment in many other asset categories apart from equity and fixed income, e.g. real estate, international stocks, currency, etc.)

The big question in deciding the asset allocation is: “How much money should be allocated to which asset category?” The answer depends on three things: (1) the need to take investment risks, (2) the ability to take such risks, and (3) the willingness to take risks. One can have a separate detailed discussion on these three. However, broadly, the need to take risks arises when one needs returns higher than the safe short-term Government securities. The ability depends on one’s financial as well family situation and the willingness is a function of how soundly one can sleep at night after making certain investments.

Once the allocation is made to various asset classes, one has choices (1) let the allocations change in line with changes in asset class performances, or (2) rebalance the asset allocation to the original ratios, or (3) take market views and increase or decrease the allocations to various asset categories based on one’s views on the relative attractiveness. Most investors would be better off with taking the approach number 2.

Let us understand this approach, known as rebalancing the asset allocation to the original levels.

Let us assume that after assessing the needs of one of the clients, the advisor recommends investment of 50% of the assets in an equity mutual fund and 50% in a money market mutual fund. The investor and the advisor then decide to review the performance of the portfolio every six months. The review process is also very simple. The objective would be to maintain the allocation between equity fund and money market fund at 50:50.

Given that the stock prices are volatile over shorter terms and move in line with the profits of the company over longer periods, we are likely to see the value of the equity mutual fund go up and down over time. When that happens, the asset allocation would stray from the 50:50 that was set originally.

When the equity prices move up faster than the debt prices, the allocation will get skewed in favour of equity and our review process would restore it back to 50:50 by shifting some money from equity fund to debt fund. In the other case, when the equity prices move adversely, the balance would get skewed towards debt and the balance can be restored by shifting from debt fund to equity funds. What you are doing here is selling equity when the prices run up and buying when the units got cheaper. One is able to do this without having to worry about analyzing what is happening in the market place.

The above example is applicable to an investor, who has a static portfolio without any additions into the portfolio or withdrawals from the same. In reality, the investor may get inflows, which need to be invested in the portfolio or have a need to take some money out of the investments. In such cases, at the time of investment or redemption, the investor has to look at the current market value of the equity fund and debt fund and rebalance the portfolio to 50:50.

Automatically, the money goes into equity fund when the stock prices are low and into debt fund when the stock prices are high.

The only problem with the above is that what looks so simple is very difficult to execute since the approach means ignoring all the sound bytes taking place around you. It takes a lot of courage to chart one’s own course and more importantly, to continue walking that path – at times, all alone.

Maintaining the asset allocation helps an investor work the volatility in one’s own favour.

Wish you all a very Happy New Year!

-        Amit Trivedi

The author runs Karmayog Knowledge Academy. Recently, Amit has authored a book titled “Riding the Roller Coaster – Lessons from Financial Market Cycles We Repeatedly Forget”. The views expressed are his personal opinions.

Questions on mutual funds, answered

Investors had queries on investing and mutual funds. Here is the link to the transcript of the chat:

Build wealth with mutual funds

The book's cover page