A good guide for beginners and intermediate investors
When it comes to investing, there are probably as many books on what not to do as there are on what to do. This is because the complexity induced by financial products—and the advice that comes while they are being pushed—leave financial consumers dissatisfied, and even angry. Consider stock investing. Over the past 23 years, the Indian stock market has made tremendous strides. We have electronic trading, clearing, settlement system and depository system which has attracted a deluge of money from foreign institutional investors (FIIs). In spite of these favourable factors, most retail investor continue to shun stocks, though mutual funds have started attracting more money now.
The reason is simple: consumers have a poor experience with financial products. Many have been lured into the stock market through unit-linked insurance plans, which have performed poorly. Health insurance is too complex and policyholders are often in dispute with insurance companies. The wealthy do not have it any better. They are goaded to invest in portfolio management, private equity or structured products or debt mutual funds—often, at the wrong time. Why is the experience of financial consumers so poor when brokers, planners/advisors, financial distributors, insurance agents, banks (and their relationship managers), supported by dozens of print publications and many TV channels, are there to help investors with over 3,000 actively traded stocks, hundreds of mutual fund schemes or insurance products, apart from savings schemes, provident fund and the new pension system?
Unfortunately, the dice is loaded against investors because of several reasons. One, financial products companies have a high-cost structure, leading to steep sales targets which lead to mis-selling. Two, many products are irrelevant or harmful. Insurance products are complicated to understand and do not deliver. Many mutual fund products have fancy names but average performance. Three, regulators are of no help. If there is mis-selling, redress of grievances is not easy. Four, intermediaries are incentivised to sell more and more, which favours turnover/ churn, harming customers’ interest. Five, the big media is driven by what is popular and that may not be in the best interest of investors. Six, India woefully lacks unbiased and well-researched advice. In such an inimical environment, the first job of investors is to avoid mistakes. Author Peter Mallouk, an investment advisor, has a list of mistakes you should avoid at all costs: These are:
1 Market-timing. Market-timing is the graveyard of many ‘experts’; don’t try it. We half-agree with this view. If you buy market-linked products, your returns will be poor, or negative, if you buy high. Conversely, your returns will be very high, if you buy them low. Some rough sense of timing is important.
2 Active trading. This is only meant for full-time professional traders. Most others lose money.
3 Misunderstanding performance and financial information. Mallouk points out nine different ways we misunderstand, including believing that financial media exist to help you make smart decisions or that all-time high indices means that the market is due for a pullback or that financial news is actionable, etc.
4 Letting yourself get in the way. This section covers well-known behavioural biases investors suffer from including fear, greed, herding, overconfidence, confirmation, anchoring, loss aversion, recency, etc.
5 Working with the wrong advisor. In India, independent advisor hardly exist.
Mallouk ends the book with a set of rules that will help you get it right:
Rule 1: Have a clearly defined plan.
Rule 2: Avoid asset classes that diminish returns.
Rule 3: Use stocks and bonds as the core building blocks of your intelligently constructed portfolio.
Rule 4: Take a global approach.
Rule 5: Use index-based positions primarily.
Rule 6: Don’t blow out your existing holdings.
Rule 7: Asset location matters.
Rule 8: Be sure you can live with your allocation.
Rule 9: Re-balance.
Rule 10: Revisit the plan.
We agree with almost all these. Rules 4, 5 and 7 do not apply to Indian conditions. Overall, a good book for beginners and intermediate investors.