Are investors con-prone?
Gopinath Mavinkurve 21 August 2013

Overwhelming greed seems to pip investment rationale, even to those who are better equipped with the fundamentals of investment

Each passing day, newspapers and TV channels report how some unscrupulous business house offering miraculous money multiplying  ‘opportunities’ to the public vanish into thin air, leaving investors licking deep wallet-wounds. Some retired senior citizen even report to have lost all their hard-earned life-time savings, which they had invested in various get-rich-quick schemes. Reading such reports, one wonders what is it that makes such ‘scheming’ business houses successful, although the press has been reporting Ponzi schemes which inevitably do the vanishing trick leaving investors in the lurch. Don’t such repeated acts of financial cheating make us investing folks all the more wary of tall promises and urge us to ask ourselves-how can these businesses offer such high returns in such a challenging business environment  and deteriorating domestic economic conditions? 
 

The success of such schemes can be attributed to several layers of urban and rural population which have been rising slowly but steadily from their hitherto hand-to-mouth existence, to reasonable earnings and living standards due to changing economic fortunes. They have investible surpluses (however meager), which they would want to put away for a better future, but do not have the basic knowledge of investment, let alone financial prudence!  This translates into thousands of lower middle class households, eking out a living in Tier-III towns, having small surpluses that are looking for a good return on their small savings.  Private finance firms promoted by business houses exploit these conditions and plant ideas of how their schemes could help them beat inflation, whereas bank fixed deposits (FDs) offer interest rates lower than inflation, eating away into their savings!
 

Every Indian faces challenge on account of inflation eating away into interest bearing, but relatively safe bank deposits. However, the fact remains that the more important aim of any investor - capital protection - is thrown to the winds, while attempting to beat inflation! Loss of capital is one aspect that every investor, big or small, needs to be concerned about.   Return on investment is not the only criteria – return of investment is paramount.  This is because while comparing investment options, a small investor takes this as given and does not even think of such tragic eventualities as loss of capital.  In reality, this question ought to prop up in the minds of small investors. Each time an offer with super-duper returns on their investment are offered to them!  Another question that investors do not ask is: How come these business houses can offer such high returns in a competitive business environment? Obviously, overwhelming greed seems to pip investment rationale, even to those who are better equipped with the fundamentals of investment.
 

There is one important aspect that unscrupulous scheme offers bank on - that investors would not mind investing a small portion of their investible surpluses in such schemes.  It is tempting to try it out with smaller amounts and then invest higher amounts in such schemes, if they taste success.   Invariably, this trick seems to work for conmen! Several small investors trying out their hand at such get-rich-quick schemes (offering as high as 5%-10% per month at times), translates into cash flows of several crores of rupees for such business houses!   Most of the investors barely recover their invested amount. Yet, what is more intriguing is that once they get returns for some months initially, their faith in the scheme soars sky high, prompting them to invest more!
 

A simple back-of-the-envelope calculation would tell us that even @10% per month, in three months, they have got only 30% of their investment back. Although it is too early to judge them on return of capital, there is a false sense of belief built around returning them 10% per month, when banks cannot offer that even in the whole year! What is more, they even rope in other relatives and friends to invest in the scheme citing their own ‘success’.  This is indeed a disastrous step-risking souring of relationships, in addition to the company defaulting on interest or principal repayments.
 

The basic problem is that most of us undergo education at schools and colleges, in which “investor education” is not taught-this is not part of the syllabus in any stream.  Fundamental aspects of investment such as return on investment, safety of invested amount, liquidity and capital appreciation, investor rights etc. are least understood subjects and are learnt only the hard way – by losing money! The one who puts all his savings into such schemes needs to learn about the adage of financial prudence- “Do not putting all your eggs into the same basket” – and remember it when it mattered most. 
 

Several such small investors make fly-by-night financial product offers hugely successful by ‘investing’ their small and big investments. Conmen regroup and form other financial syndicates to come back again to the public to raise monies, only to vanish again and reappear in different avatars.  How long will this conning activity continue? Both widespread investor education and strong regulatory controls on raising public moneys are the need of the hour.  Each and every one needs to know that ‘too-good-to-be-true’ schemes are just that – Scams!  One fervently wishes that enlightened members of the public ought to pledge not to support such schemes with even one rupee of their hard-earned money.   Instead, one could donate that rupee saved for a good cause, if one would like to kiss it goodbye anyway!
 

Social entrepreneurs and activists have been educating the lay public through street skits. Magicians have been debunking fake religious heads for performing “miracles” that are nothing but a sleight of hand. They are spreading the word not to repose “blind faith” on those claiming supernatural powers. Similarly, some financial “wizards” seem to be offering “miracle financial products” to struggling masses and they too ought to be debunked in a similar manner.  More recently, ad campaigns on television channels on several social ills, for example, consumer protection body, has launched a series of successful “Jaago Grahak Jaago” ad campaigns on all TV channels. Investor protection campaigns need to be propagated on the same lines. 
 

On one hand, tighter regulations are needed to ensure that any firm raising money from public gets his proposed scheme approved from the Government before embarking on the offer. Also, the Government through the various branches of the Public Sector Banks could also take up this cause of investor education and spread prudent financial decision-making skills to small investors so that the savings can be brought into the mainstream economy instead of losing it all to scam operators.    Instead of promoting complex financial products like mutual funds, investment-cum-insurance products, which are all too confusing even to the financially savvy amongst us, investment programs should be structured by SEBI, RBI and other regulatory bodies jointly.
 

Jaago Niveshak Jaago!

Comments
sk singh
8 years ago
Can somebody explain : some body purchase share @X and same share is sold by somebody @X - both hopes they are doing good.....but somebody is loosing and somebody is gaining.......is it not speculation ?.......
Nilesh KAMERKAR
Replied to sk singh comment 8 years ago
Here is an attempt to explain, hope it is helpful

1) Selling a stock that you own, for raising required cash for meeting expenses cannot be described as speculation, irrespective of the price at which you sell. Price in such cases may not matter.

2) Selling a stock because looks overvalued as per your analysis or has reached your target price for selling is not speculation. Even though it keeps on climbing after you have sold. Every seller carries this risk of selling below the peak price.

3) However, selling a stock 'short' or selling an owned stock with the sole intention of buying it back, because you expect a fall in the price of that stock / or fall in the market leading to a fall in the price of a stock - is most certainly speculation.

Being forced to sell a stock for meeting margin calls are necessarily an outcome of speculation having gone wrong.
Vaibhav Dhoka
8 years ago
When there is GREED there is in built HIGH risk.No investment avenue is risk free.But in many cases cone men get support from regulator or police.It serve their purpose and Investor is at receiving end.
Vinayak Bhimarao Mudholkar
8 years ago
There is an increase in the rate of crime not only in finance but everywhere. Are we going the Egypt way?
Nilesh KAMERKAR
8 years ago
Con-prone investors is an oxymoron.
nagesh kini
Replied to Nilesh KAMERKAR comment 8 years ago
Nilesh - figures of speech matter little.
It is greed pure and simple whether in day trading,speculations or money multiplying ponzi schemes. Investor does it with his eyes open. The con-man is out to earn his living.
"Duniya jhukti hai, jhukanewalla chaheye." The aam janaata is the duniya and the conman the jhukanewala. No oxymoran!
Nilesh KAMERKAR
Replied to nagesh kini comment 8 years ago
Dear Mr. Kini,

Day trading, out right speculation and money multiplying ponzi schemes are not investments. And people indulging in such reckless ventures cannot be referred to as investors.

Investors by definition are careful. Benjamin Graham, the father of Security Analysis has defined investing as: " An investment operation is one, which upon thorough analysis, promises safety of principal and an adequate return. Operations not meeting these requirements are speculative".

Now, Mr Kini Please tell me if Con-prone investors is not an oxymororn . . .
pravsemilo
Replied to Nilesh KAMERKAR comment 8 years ago
To be frank, this definition was again discussed in his book "The Intelligent Investor". It was discussed that media has manipulated the definition of investors by using the terms like "reckless investor.... rushing in on the buy side". Even today when newspapers talk of ponzi schemes (or even stock markets), they use the word investor.

If con-prone investor is an oxymoron, then careful investor should also be an oxymoron, because no matter how much skilled one is or how much research one does, there is still a risk.
Nilesh KAMERKAR
Replied to pravsemilo comment 8 years ago
Yes, this definition of investing appears in the book 'The Intelligent Investor'.

Investing is about managing risks, not about avoiding them. And risk is defined as probability of a loss.

When capital is deployed in a business enterprise, it entails risk. And this risk must be borne by someone. Whereas those who cannot be classified as investors undertake to play those odds which are mostly unnecessary and are created not because of any productive economic activity. (like in gambling)

Investing is about underwriting /assuming risk at a favourable price on a group basis so as to mitigate the risk of loss of principal and earn an adequate return.

Just because media classifies participants in ponzi schemes as investors. It doesn't make them investors.
pravsemilo
Replied to Nilesh KAMERKAR comment 8 years ago
I am sorry. I agree only partly to your definition. I don't agree with the "loss of principal" and "adequate return" aspect.

Consider this - When the HUL buyback was announced at 600/share, it was trading at 470 something. Someone could have bought the share hoping that he could sell at 600. He is taking the risk of price not reaching 600. But in the end his principal is intact and he has earned adequate return. So is he an investor?

Now consider this - Yes Bank was a good stock fundamentally, until the promoter tussle came out in public. It is still a good one. While it was quoting at 250-300 odd in 2011, one could have bought it hoping to earn adequate return. Now if for some unforeseen (personal) reason if he has to sell it and book losses (after the promoter tussle) would he not be classified as an investor just because he has lost principal despite he doing a fundamental check?

Same thing can be said about Bank of Baroda, Dena Bank, BHEL which hit 52 week lows a month back and now are around 20-50% down from that price. If I would have bought the stock a month back would that not make me an investor just because my principal has eroded. Had I purchased them now will that make me an investor?

It should be the intent and ideas behind investment rather than terms like loss of principal and adequate return to define an investor.
Nilesh KAMERKAR
Replied to pravsemilo comment 8 years ago
Your interpretation is different from what am trying to say.

The limited point which am trying to make is, participants of ponzi schemes do not exercise due caution and hence can't be called investors.

Because investors by definition have to be careful, they avoid being con-prone. And more importantly con-prone individuals driven by greed are most certainly not investors.




Vinay Joshi
Replied to Nilesh KAMERKAR comment 8 years ago
What do you say on G-Sec? Are YOU NOT CONNED? Will you admit to be an 'oxymoron', in your own words, i'm not stating anything!

Regards,
Nilesh KAMERKAR
Replied to Vinay Joshi comment 8 years ago
About Govt bonds being a Con . . . I have nothing to say, I give up Mr. Joshi.
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