Book Reviews
Review of ‘The 5 Mistakes Every Investor Makes’
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.
 

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Nifty, Sensex continue to be weak – Thursday closing report
Nifty may put in a small rally on Friday but the trend is down
 
We had mentioned in Wednesday’s closing report that Nifty, Sensex are weak and that Nifty may bounce back a bit but the trend is lower. Negative global cues from US and Asia led the major indices in the Indian stock markets to a downward trend. The trend in the major indices during the day’s trading is given in the table below:
 
 
The US Federal Reserve decided to leave the interest rates unchanged in its monetary policy meeting for its country. The Fed warned that it may raise interest rates in its December 2015 meeting. This warning adversely affected investor sentiments in Asia and India. The price of the OPEC basket of twelve crudes stood at $43.20 a barrel on Wednesday, compared to $42.40 on Tuesday, up 1.89%. Gold prices fell 1% on Wednesday, in the metal's weakest session in a month, as the market turned lower after the US Federal Reserve left the door open to a possible interest rate hike in December and the dollar hit a 2-1/2-month high. If the US Federal Reserve sticks to its warning in December 2015, the rupee is likely to come under pressure. 
 
City Union Bank on Thursday said it closed the quarter ended 30 September 2015 with higher profit and income. In a regulatory filing with the BSE, the bank said it has posted a net profit of Rs107.84 crore for the second quarter of the current fiscal, up from Rs93.74 crore posted during the quarter ended 30 September 2014. The bank's total income during the period under review stood at Rs.829.44 crore, up from Rs.772.99 crore earned during the quarter ended 30 September 2014. The bank's gross non-performing asset (GNPA) and the net NPA went up marginally at the end of 30 September 2015, to Rs.398.29 crore and Rs.255.93 crore respectively. Its share price closed at Rs86.50, down 1.42% on the NSE.
 
State-run Syndicate Bank on Wednesday reported a net profit of Rs332 crore for the second quarter (July-September) of this fiscal 2015-16 as against Rs316 crore in like period last year, posting only 5% growth. Sequentially, however, net profit rose 9.9% from Rs302 crore in first quarter (April-June) of this fiscal. Operating profit for quarter under review (Q2) increased 28% year-on-year (YoY) to Rs1,225 crore from Rs954 crore in the same period a year ago. Its share price closed at Rs94.70, down 0.94% on the NSE on Thursday.
 
Dabur India on Wednesday announced 18.7% increase in its net consolidated profit at Rs341.1 crore for the quarter ended 30 September 2015 as against Rs287.5 crore in the year-ago period. The company's consolidated net sales for the second quarter of the current fiscal year marked an 8.7%  growth at Rs.2,092.1 crore - up from Rs.1,924.1 crore in the same quarter a year earlier. The Board of Directors of Dabur India has declared an interim dividend of 125%, aggregating to a total payout of Rs.264.65 crore for 2015-16. Its share price closed at Rs272, up 0.02% on the NSE on Thursday.
 
On the BSE, good buying was observed in consumer durables sector, while selling pressure was seen in power and fast moving consumer goods (FMCG) sectors.
 
The top gainers and top losers of the major indices are given in the table below:
 
 
The closing values of the major indices in Asia are given in the table below:
 

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Mudra Bank is not a game changer, says report, based on experience of SKS Microfinance
With 10% cap on spread, large NBFCs and MFIs like SKS will not see any improvement in margins or profitability and a cheaper loan from Mudra Bank may not make it into a game changer, says Religare 
 
SKS Microfinance Ltd (SKSM) on Wednesday said the Micro Units Development & Refinance Agency (MUDRA) has sanctioned a refinance line of Rs100 crore to the lender at an interest rate of 10%. However, since there is a 10% cap on spread for all large non-banking financial companies (NBFCs) and micro-finance institutions (MFIs), lower funding cost does not improve margins or profitability, says Religare Capital Markets Ltd in a report.
 
At present, the average funding cost of SKSM is about 11.9%, while incremental funding cost is around 11.2%.
 
Religare, in its previous report has said that Mudra Bank's micro unit refinance scheme has turned out to be a non-starter due to the strict caps on onward lending spreads. As against a current corpus of Rs5,000 crore, Mudra Bank has disbursed just Rs150 crore to banks and MFIs since April 2015. 
 
The RBI has fixed the rates at which Mudra Bank can lend funds under its refinance scheme for unsecured micro loans. For banks, this will be at cost of funds (COF) + 0.75%, for co-operative or regional rural banks at COF + 3.5%, and NBFCs or MFIs at COF + 4 to 6%. The central bank has also capped the spreads that banks, NBFCs and MFIs (Fig2) can charge borrowers if they avail of refinancing from Mudra. While banks have to lend at base rates, NBFCs and MFIs cannot earn spreads over 6% and 10% respectively, implying lending rates of 16-18% for NBFCs and 20-22% for MFIs. This renders Mudra refinancing unattractive due to the high operating and credit costs involved in unsecured microfinance lending.
 
This also means, small finance banks (SFB) can avail loans from MUDRA at much lower rate than MFIs. "Mudra is lending at 6.75% to universal banks. However, borrowing rate for SFB is not decided, in our view it will be lower than MFIs and marginally higher than rates charged to universal bank i.e. between 6.75-10%. One of the main objectives for Mudra is to enable banks to fund low-income people at much reduced cost. Small finance banks will be better off as compared to MFIs, if they get funding at a cheaper cost by about 100-200bps," Religare said in its latest report.
 
Religare feels MFIs who got the small finance bank license will see rating upgrades and in turn reduced cost. "We believe SFBs will see rating upgrades by at least 2-3 notches which will result in lower cost of funds. In our view, their ability to tap wholesale market has already improved (recently few MFIs who got the license have done CP issuance at 10.5%). Post conversion into a bank, SFBs will have similar or lower cost of funds compared to MFIs resulting in immense competition," it concluded.
 
SKS Microfinance closed Wednesday 6.4% up at Rs425.70 on the BSE, while the 30-share benchmark ended the day marginally down at 27,039.

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COMMENTS

Raghavendra

2 years ago

Religare is spreading lies about SKS Microfinance. Even in the face of spectacular results and revised guidance it is trying to beat the stock hook and crook. Shame on Parag Jariwala

Raghavendra

2 years ago

Religare is spreading lies about SKS Microfinance. Even in the face of spectacular results and revised guidance it is trying to beat the stock hook and crook. Shame on Parag Jariwalas

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