During three separate interviews this week I was asked if I was seeing any signs of complacency among investors, markets, or clients.
When we find an attractive stock to invest in, we outlay money, aka invest, to earn an attractive return and the investment will involve a degree of risk.
One of the most dangerous, commonly accepted and ill thought out concepts in investing is the risk / return trade off.
That is: high returns equals high risk.
Unfortunately, Investopedia continues to spread this type dogma, as you can see by the graph below.
Volatility (standard deviation) is not risk!
The appropriate definition of risk is from the Oxford dictionary (or any other branded non-financial dictionary) as: Exposure (someone or something valued) to danger, harm, or loss.
“Become more humble as the market goes your way.” – Bernard Baruch
Lately, it feels like every time I time I log into check my investment accounts the market values are higher than the previous time I looked. The stock market continues to hit all-time high after all-time high. I have to admit, it feels pretty good when things are going your way in the markets and it seems like everything you touch turns to gold.
This is easy. Everything I buy just keeps going up.
It would be nice to assume that my intelligence has risen along with my skills as an investor, but I have to admit that’s not really what’s going on here. We just happen to be in the midst of a strong bull market. So I have to remind myself. Seeing your investments rise is no way to validate your level of intelligence. In fact, it can be extremely dangerous to your wealth when the music stops playing.
Who needs an insurance policy when all of my risky investments have been rising for years?
Researchers have found that the brain activity of a person who is making money on their investments is indistinguishable from a person who is high on cocaine or morphine. The brain of a cocaine addict who is expecting a fix and people who are expecting to make a profitable financial gamble are virtually the same. The danger in allowing a bull market to increase your confidence as an investor is that it can lead you to take unnecessary or avoidable mistakes to continue to get that high.
When it comes to gauging the worthiness of an investment, investors often land way off the mark. Most treat short-term returns as a yardstick, while others have unrealistic expectations. Yet others misinterpret returns completely. However, correct assessment of performance is a must to avoid bad investment decisions.
For most investors, point-to-point return figures serve as the performance yardstick. This can be misleading. The current return profile of equity funds, for instance, is a case in point. The three-year returns of most equity funds comfortably outshine the five-year figures (see chart). Large-cap funds have clocked 13.5% CAGR over the past five years compared to 17.8% over the past three. Mid-cap equity funds have yielded 20.6% CAGR over the past five years against a whopping 34% in three years. To the lay investor, this sharp disparity in returns poses a dilemma—if the return is so much higher for a three-year period, does it make sense to stay invested for five years or more? But the investor is overlooking two critical elements here. First, he is considering a singular point-to-point reference from the past to make an assumption about the future. Second, he is ignoring the difference between annualised returns and simple absolute returns.
I find it ironic that more research is being done today than at any point in time in the past, yet a lot of value investors are failing to beat the market.
Ironically, the mountain of articles on popular investing websites just aren’t helping. Part of the problem might be due to the “more brains” problem Graham cited years ago. Since everybody on Dalal Street is so smart, all those brains ultimately cancel each other out.
This glut of brain power, investment research, and investors clamouring for bargains does not mean that you can’t beat the market. But, knowing how to pick value stocks is a key requirement, along with having a good strategy and being prepared to do things that most other investors aren’t.
The original article appears here on the website of Forbes India.
The quality of the people running the show can make or break an investment decision, says master investor Nemish Shah
Nemish Shah is a reclusive man. He has not met the media for over 15 years. Even after Axis Bank took over his firm Enam Securities in 2010, he was neither seen at press conferences nor were his pictures bandied about in the media. So when he agreed to talk to Forbes India about his investment philosophy, we were excited. We met him at his sprawling office in downtown Mumbai’s Express Towers with stunning vistas of the Arabian Sea. The office is simple with light brown furniture and plenty of open space. There is no receptionist. It is quiet but it does not have the coldness of a private equity firm.
Shah, 59, co-founder and director of Enam Holdings, comes out and smiles warmly. He ushers us into his room at the appointed time of 12.15 pm. Tall and fit, the master investor, walks in a brisk manner. And we quickly get down to business.
Meeting with individual investors over the years has taught me much about investing mistakes. No matter how you classify investors (i.e. fundamental, technical or confused), the mistakes they make are almost invariably identical.
While some mistakes are the result of simply not knowing what to do, many are the results of either (i) losing interest; or (ii) getting overly greedy or fearful, particularly when the tide turns. In either case, much money is lost when people assume things will simply take care of themselves.
Recently, a team member came across this article in Forbes Magazine which talked about leveraging the collective wisdom of people in the organisation. Extending that same thought process, can’t we do something similar when investing. We have investors, analysts etc. discussing their ideas and stock picks on social media. Why can’t we leverage their collective wisdom to make the right pick? Think on it.
Do you have a solution in place that can help you achieve this? Yes help is at hand.
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