DSIJ Mindshare

Don’t Be Just GOOD,Do It BETTER While Investing

Sejalbhai Mehta has a flourishing business of car rental while also working for a private sector insurance company at a senior level in Ahmedabad. The amount of money he earns from his part-time business, mostly monitored by his wife, Rajalben, is invested in the equity markets, real estate and also in precious metals. In his early forties, Mehta using his exposure in the insurance and stocks markets, judges himself as a good and wise investor. But on November 9 this year, when markets across the global witnessed a freefall on the wake of outcome of the US Presidential elections and India faced the worst as the government in the previous night scrapped both Rs 500 and Rs 1000 notes, Mehta lost a huge chunk of money in the markets. He confided to his friends that although he had been a ‘good investor,’ he was not really a ‘better and smarter’ one. After witnessing the bloodbath on the Dalal Street on that Scary Wednesday, Mehta now wishes to understand the world of investments better and also in a smarter way. His depleting wealth has become a big concern not only for him and his family members but also for the friends around him who used to take market related cues from him while investing.

Investing in stocks, properties, metals, mutual funds, insurance and several such products can be termed as a straight and simple human instinct. Each one of us wishes to see a better tomorrow and investment decisions are mostly taken to achieve the said goal. Being an investor is a simple thing but being a ‘better investor’ is not that simple. It requires loads of persistence, tolerance, patience, power to take right decisions, identifying the right moment, right instrument and right avenue in the world of investment.

It always has been our endeavour in the Dalal Street Investment Journal (DSIJ) since last 30 years to help you taking the right investment decisions. Using this report also, we make a sincere attempt to remind you about the paths to be taken and also not to be taken while becoming a ‘better investor’ and smarter too. We have also done a survey of reader-investors by asking them 10 questions and analysed their responses in detail to ascertain their take on successful investing in capital market. While reading through this cover story package, you will also get to know the outcome of the survey in which a very large number of reader-investors have participated.

When it comes to investing your hard-earned money, the first thing that comes to anyone’s mind is how to multiply his or her wealth going forward. There are various options available in the capital market, but to pick one that is right is the key to multiplying wealth. Another important step on the way to become a better investor is the process of proper allocation of funds.

Here are some important tips to our reader investors while investing in the capital market—start early, understanding one’s risk appetite, setting up a goal, investing for tax gains, long-term investments, understanding the business of the companies where you are parking your money. Also there are clauses like knowing promoters of the companies, being aware of falling stocks, being consistent, averaging investment costs, regular investments, no to panic sell, focus on assets allocations, regular monitoring portfolios and also not having regret like Mehta.

Let us pick five or six most important ones among all of these clauses.

Understand your risk appetite: One of the major factors that should be considered before investing is the investor’s capacity to take risk and ability to sleep well even during turbulent hours and days. You need to allocate money to your equity portfolios accordingly. Abhijit Bhave, CEO of Karvy Pvt Wealth, explains, “Don’t put all your eggs in one basket. We have learnt this age-old wisdom in our school linking this to investment is important. Simply put the jargon asset allocation means we should put our investments across asset classes like real estate, gold, debt and equity. To arrive at this right asset allocation, it is important to assess your risk-profile which is a combination of your demographic, psychological make-up and your presence circumstances.”

Invest for tax benefits: The profits on equity shares traded on the stock exchanges in India held for less than 12 months are taxed at a flat rate of 15 per cent. However, in case of short-term gains, though the shares are listed in India, your liability on such short-term gains will depend on the slab rate applicable to you.

However, if you hold stocks for more than one year, then you will not be liable to pay any tax on such investments, which is quite attractive.

Any dividend received on shares held in an Indian company is fully exempted from payment of tax. However, the company is required to pay a tax called Dividend Distribution Tax on such dividend at the rate of 15 per cent on such dividend. So effectively 15 per cent tax on your behalf has been paid by the company on the dividends received by you. Explaining the issue, Bhave further says, “Ignoring the tax implications of particular investment could reduce your returns substantially. Apart from the risk return, it is equally important to know what your tax outgo would be before making an investment.”
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Invest over the long term: There is no shortcut to growth. Invest systematically and consistently over a period of time to make big money.

Average your investment price: Averaging the price of your shares makes sense when macroeconomic factors are not favourable for the markets. However, while doing so, one must be sure that the share price of the company is not declining due to reduction in earnings or something has gone wrong fundamentally with the company. So, before putting your money into an investment, know the potential downside before it occurs rather than after.

Don’t sell in panic: One should not sell stocks in panic when your goal for investment is long term. There are various events and developments that trigger sharp fall in the market, such as surgical strike by Indian Army, BREXIT from European Union, etc. The stock market witnessed selling pressure due to panic selling in these instances, but once the dust settled, the market recovered within a short time. Also, one cannot predict the recession leading to the crash of equity markets that happened in 2009.

If you look at the returns of BSE Sensex since its inception, you will be surprised to know that one rupee invested in 1979 has grown to Rs 229.66 today. The graph below shows that keeping faith in your investment and being opportunistic is very important in the market, although there are many companies that were part of BSE Sensex in 1979 but are not part of the today’s Sensex. So one does not need to stay invested in index stocks only, as there are many factors leading to the entry and exit of companies from the market indices.

While investing in stocks, one needs to be more cautious. One should review the portfolio of stocks at least once in a quarter. It is not a good idea to watch your portfolio movements on a daily basis, unless there is strong stock-specific reaction in your portfolio.



A Check On Emotional Stability Is Also Important

Investing is not a perfect science and one learns and improves along the investing journey, says Amit Joshi, CIO, Bajaj Allianz General Insurance Company

Who do you define as ‘better investors' in today's dynamic environment?

To become a better investor is more of a journey than a destination, as you keep learning with your investment experiences. There cannot be a precise definition of a better investor, however there are certain traits which are likely to help a person become a better investor. Discipline, thorough analysis, understanding of human behaviour, emotional stability and ability to process quantitative and qualitative information are some of the key traits which will help in making better investment decisions. The world is changing at a rapid pace and to be able to foresee the emerging trends will require all these traits and more to invest profitably.
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What are your five principles on smart investing? 
As I have mentioned above: 
1. Disciplined process - this will help in maintaining a framework which in turn will help in filtering out noise 
2. In-depth analysis - Try to learn and understand all you can about the company you want to invest into. 
3. Understanding of human behaviour - How the management behaves in good times and bad
4. Emotional Stability - Will you stick to your decision in case of a downturn? 
5. Ability to process quantitative and qualitative information 

The list can be longer as each investor would have his own set of rules and processes. Ultimately, investing is not a perfect science and one learns and improves along the investing journey.

What are the most common mistakes made by long-term investors? 

Each investor has a repository of mistakes made over the investing life. The trick is to learn from them and not repeat them. One of the most common mistake, I have noticed is falling in love with a stock/sector and ignoring the message which the financials and fundamentals are delivering. This can be a painful mistake as it gets magnified with the passage of time and very difficult to correct if one is holding a significant position in the stock.

Which, according to you, are the best investment avenues available in India today?

Equity as an asset class is likely to provide better inflationadjusted returns in India. The economy is looking up after a long period of slowdown and there are exciting investment opportunities available across the market. A disciplined investment strategy in equities is likely to benefit the portfolios in a 3 to 5-year horizon.

Keep A Watch On Assest Allocation

How would you distribute Rs.100 into different asset classes? I must admit this is a difficult question to answer. I would want to know the type of investor that I'm advising, the universe of choices that I realistically can mobilize, the investment horizon, and perhaps even the tax regime that I'm operating under. But let's consider a retail investor that is asking for some "smart" portfolio allocation over a one-year horizon that does not have any unique or special requests. Here are a few allocations with very interesting characteristics (note that UCITS are liquid alternative investment strategies that adhere to UCITS regulations)



The main point in showing these data is not to find the best combination of risk and return, as these are time period specific, but instead to point out that even retail investors can access interesting combinations of traditional and alternative investment choices. If I were a retail investor, I'd be very interested in an asset allocation that goes beyond traditional investment choices. So now let's consider the institutional investor. Given the maximum flexibility enjoyed by accredited investors, the choices available are quite diverse, potentially complex, and in some cases very attractive. I offer as one example the significant change in the investment landscape of university endowments that have embraced the private equity asset class and have achieved (in some cases) terrific results over many years' time. The same can be said for other illiquid asset classes, such as commercial real estate and infrastructure.

Investors' Survey Outcome (October 2016) 400 + Responses






Graph 1:
Referring to this graph, we observe that majority of the retail investors believe both technical analysis and fundamental analysis are crucial to act smart at investing game. Interestingly, only 4 per cent believe that technical analysis alone is good enough to crack the stock market code.

Graph 2:
As per this illustration, as many as 33 per cent of the investors believe that they are willing to stay invested for till atleast one year to make money in the equity markets. On the other hand, 29 per cent of the investors prefer investing for upto three years in the equity markets to create wealth.

Graph 3:
Valuations remain the single most influential factor which investors pay heed to when it comes to analysing markets as the survey findings note. According to the survey, 35 per cent of the investors pay heed to Valuations and almost 31 per cent suggested they will look at valuations, expert views and FIIs & promoter holdings in the companies to make their better and smart investment decisions.

Graph 4:
The survey indicates almost 34 per cent of the investors believe research is the most important factor that can help investors become better ones whereas almost 32 per cent of the investors believe having a portfolio approach is the most important factor towards becoming a better investor.

Graph 5:
As per this illustration, when it comes to hiring experts for their investments, investors seem yet not ready. Only 13 per cent of the investors who took part in this survey think hiring market experts is the best way to go ahead with their equity investments whereas 51 per cent of the investors believe in self-study & self-decision making to beat markets consistently. An impressive 35 percent of the investors surveyed think listening to experts is crucial.

Graph 6:
While 41 per cent of the investors surveyed believe there is no fixed formula for making money in the markets only 8 per cent of the investors think trading ability crucial to make money consistently. Almost 19 percent of the investors think market timing will help make money in the equity markets.

Graph 7:
You can figure out from this graph that focusing on the age old question of which style is better for smart investors, almost 48 per cent of the investors believe adopting growth investing strategy is most important when it comes to generating above average returns while a good 44 per cent believe adopting value investing techniques to build portfolio will help them make above average returns. There seems to be a slight preference among investors towards growth investing when it comes to generating excess returns in the equity markets.

Graph 8:
Investors when asked about their views on when to pick fundamentally good stocks to generate excess returns 36 per cent of the investors suggested that a good quality stocks should be picked when it has risen substantially higher from its recent lows and almost 28 per cent believe it is a good strategy for investors to buy fundamentally qualified stock that has fallen substantially from its recent highs. 24 per cent of the investors think it is a good idea to accumulate stocks with strong fundamentals that are trading close to their 52 week lows.

Graph 9:
Almost 79 per cent of the investors said they do not believe in intra-day trading to make money in the markets. As many as 21 per cent of the investors surveyed, revealed that they prefer intra-day trading techniques to create wealth in the equity markets.

Graph 10:
This graph interestingly reveals 15 per cent of the investors agreed to trading based on rumours and market buzz & tips while almost 85 per cent of the investors do not agree on trading based on rumours and tips for making money in equity markets. 
( Survey Carried Out By Poonam Singh)
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Stay Grounded And Keep Learning

Focus on earnings of the companies you own rather than their share prices to make as much money as the companies make, advises Raamdeo Agrawal, Co-Founder & JMD, MOTILAL OSWAL FINANCIAL SERVICES

It is often said that investment is more of an art than science. Do you agree?

Yes, particularly if investment is for a limited period. But for the longer run, it is more of a science than art.

As an individual, how should one focus on becoming a better investor?

First is to understand the difference between speculation and investing. Second, understand the power of equity. Third, understand the power of compounding. If you understand all these three things, you will have enough motivation to become a better investor.

In your view, does a formal training help investors in honing their investing skills?

What sort of training is advisable? Any example you would like to share with us that suggests improvement in performance post formal training? Working in a good investment house and reading investment books/journals is a good starting point. Later on, you must learn to invest your savings in a most optimal way. Your incentive structure will make you better by the day. Passion for equity will be a big differentiator.

In a world of so many wannabes, only a few are successful investors. What are the common traits of successful investors? 

How can an individual investor adopt, imbibe and develop such qualities in himself? There are million ways of making money. One has to find one's own style and philosophy of investing. Some of the qualities such as using common sense to understand the value of the company as distinct from the price is the most important habit. Second thing is the reading habit. Phelp has said that to make money in the stock market, you need to have the vision, courage and, above all, patience.

According to Warrant Buffet, one should not try to predict general business fluctuations or the direction of the stock market. What should a retail investor learn from this advice?

You must focus on earnings, earnings, and earnings of the companies you own. Don't bother about what the market is doing. You will make as much money as the company makes.

What are the few right things an investor should do to become a better investor?

Stay grounded and keep learning.

Set Your Goals And Stick To Your Plan To Be Successful

Investors should assess their risk profile, investment time horizon and objectives and accordingly decide the ideal asset allocation to suit their needs, says Kaustubh Belapurkar, Director-Fund Research, Morningstar Investment Adviser India

Investing is neither purely a science nor an art; it sits comfortably somewhere in between the two. Often investors wonder what the one mantra to be a good investor is, and the simple answer is that there is no one right approach. Every investor needs to find his or her comfort zone. Investor behaviour plays a very important role in investing and that's what makes it more interesting. While there is no one size fits all approach that can be used, there a few guiding principles which can certainly help everyone in becoming a successful investor.

SET YOUR EXPECTATIONS AT THE OUTSET. 

The foundation to any successful investment portfolio is to spend a considerable amount of time understanding your risk profile, time horizon and investment objectives. Assessing risk and other parameters is not an easy task, but it must be done. Each investor should ask himself/herself questions like "What would I do if my investments were to crash 20% tomorrow?", "What is the end objective of this investment portfolio?", "Do I need some or all of this money in between". These are crucial inputs for ascertaining the ideal asset allocation for one's investment portfolio. Investors should assess their risk profile, their investment time horizon and objectives and then accordingly decide what would be the ideal asset allocation to suit their needs. Setting expectations right at the outset goes a long way in feeling confident about your investment decisions.

DO YOUR OWN RESEARCH

While seeking professional advice for investing is recommended, do not follow blindly everything you are told. Make sure you spend some time understanding the nuances of investing and the products you will be investing into. It's your money after all!! Investors should not be swayed by recent returns; rather the focus should be on longer term risk-adjusted returns. It is important to note that fund managers may go through phases of underperformance over the short term, but good managers will deliver excellent risk-adjusted returns over the longer term. Thus, even if the fund you are invested in underperforms in the short term, do not redeem in a hurry, stay invested for the long term to reap the benefits of mutual fund investing. Start early and be regular with your investments

Asset Allocation' Is Your Key To Gain Immunity From Turbulence

Head of Research at IIFL Wealth, Amar Ambani in an exclusive Q&A withAbhijeet Gosavitouches upon certain lesser covered aspects of investing that may help you become a better investor

Almost every advisor talks of asset allocation but lay investors often have little clue how to go about it. Your thoughts? 

The role of prompt and prudent asset allocation cannot ever be over-emphasised. Asset allocation is the key to protect you from market highs and lows that otherwise threaten to erode your capital. For lay investors to appreciate the essence of asset allocation, it needs to be demystified. Put simply, asset allocation is the distribution of investments among different asset classes in line with one's financial bandwidth (how much you can afford to invest), risk appetite (how much risk you are willing to bear) and time horizon (how long you intend to stay invested).

Won't judicious diversification within the equity class be a good strategy? 

Contrary to popular perception, asset allocation is not about diversified equity investments alone. Every asset class has its pros and cons, and it only becomes rewarding or risky depending on the prevalent market conditions. For a wholesome investment basket, even less glamorous fixed income options like tax free bonds have their place of pride. A handy thumb rule for bond investments is to invest a percent equivalent to your age. So if you are 35 years old, you should put close to 35 per cent in bonds and reserve the rest for investment in equity and other asset classes.

So, it's about a combination of equity and debt? 

It's more than that. Given the perpetually uncertain times that we live in, one can gainfully, consider Gold investment for instance, as an effective risk mitigation strategy. Market neutral strategies make lot of sense in uncertain times wherein one buys and sells stocks to neutralise exposure to the overall market and generate positive return irrespective of the markets' direction. It's most important to set some cash aside such that you don't have to prematurely pull out securities for want of liquidity.

Is it ever possible to time the market? 

Never. Investors would be better advised to go for Value Cost Averaging (VCA) instead. Lured by the pet emotions of greed and fear and fuelled by the desperate urge to time the market, people end up buying when markets are soaring and selling when markets are falling. VCA helps you make investments at regular intervals, ensuring portfolio value growth at every instalment period, regardless of market direction. It effectively helps you reduce the average cost price in a disciplined manner, by allocating higher to an asset class that has underperformed while making part booking in the ones that have soared.

Are ETFs a better bet than mutual funds? 

I am going to differ from popular theories on this one. This is not what you will hear from the commercially inclined proponents of ETFs who make a win-win case for ETFs. In my opinion, actively managed equity schemes are better than ETFs in Indian context. It's always better to pay AMC fees and bank on the experience and expertise of a professional fund manager. Unlike overseas markets that are highly mature, India still offers a huge potential for market outperformance which is why actively managed equity schemes tend to do well.

How does one choose a scrip? What are the key myths and realities involved? 

Think of every stock as a means of partnering in the given business at a price and then evaluate your options. Look at the stock value and not the level of the Nifty. Price-to-earnings (P/E) is a guide but don't solely rely on this one parameter. Besides, one can't ever ignore the need for prudent financial and business analysis, and the highly rewarding virtues of discipline and patience. Also note that a Rs.5 stock is not necessarily cheaper than another available at Rs.1000. Price is what you pay and value is what you get. And contrary to popular perception, a great company is not always the best stock to buy.

It's also imperative to expand one's knowledge horizon by reading a few good books by renowned thought leaders. I would highly recommend Benjamin Graham's ‘The Intelligent Investor', Warren Buffet's ‘The Essays of Warren Buffett: Lessons For Corporate America', Peter Lynch's ‘Beating the Street' and Robert Kiyosaki's ‘Rich Dad, Poor Dad'.

What's the key to successful investments? 

In a nutshell, it's about keeping winners and selling losers. When you get into the habit of making constant reviews, you'll know what's not working as expected. And if the review is honest, you won't get unduly emotional about any investment. For this reason, it's crucial to have only as many stocks as you can monitor without much stress. The key to successful investments is capital preservation but there are no short cuts to it. Regular monitoring is not an option, it's a must.

Is tax a key influencer in investment decisions? 

Don't invest in an instrument simply because it offers some tax advantage. Make sure these investments meet your investment objectives before locking in the said funds.

Having said that, investors should always evaluate returns on a post-tax basis. For instance, if you sold a house and had the option to either be taxed at 30% and then reinvest the residual proceeds in equity or be tax-exempt by investing in an interest bearing Capital Gains bond for 3 years, what should you do? Some may outright go for equity. But remember that post tax residual amount of Rs70 after the sale will need to grow back to ~43% in 3 years just to get back to the original amount of Rs100.

Success Mantra: Buy At A Discount And Sell At A Premium

The key to successful investing is to do one's homework diligently before investing and to avoid the herd mentality, says Ramnath Venkateswaran, Fund Manager – Equity, LIC MF.

Investing is basically the art of buying assets which are at a discount to their intrinsic value and selling them when they become expensive. This activity involves a difference of opinion with the seller when one is buying and the buyer when one is selling. Hence, the longer term success of an investor depends on two critical factors: 
1)Have a better understanding of the asset compared to the average market participant(s)-essentially involves basic accounting, mathematical and valuation skills; 
2)Behave differently than the average market participant(s)-involves avoiding widely prevalent behavioural traits. Both these attributes require fair amount of preparation and conscious effort. Wise and distinguished investors have stated that these are life-long activities that need careful nurturing.

BASIC FINANCIAL AND VALUATION SKILLS 

Key capabilities that need to be developed for assessing an asset are-
1) Basic accounting skills, which help understand financial statements and key financial ratios to assess the health of a company. An investor can attempt to at least gather the historical financial data on the companies of his interest. 
2) Read up on the annual reports of companies, note down the key takeaways and look out for any red flags.
3)Always invert your financial decisions, e.g. in case one buys a particular stock and expects to make an X% CAGR over the next five years, will that market price make rational sense at that level? Will the incremental market capitalization be driven by cash flows from existing businesses or involve new income streams or will it be led by higher multiples ascribed by markets?

BASIC BEHAVIOURAL TENDENCIES TO AVOID 

Human beings have a tendency to be comfortable in a group, act and think alike. This may be explained by our genes—our forefathers lived in fairly hostile environments, being in a group provided them necessary protection against physical harm and was a necessity for them. However, this is a trait that can be quite harmful in financial markets. Investing hard-earned money based on hear-say or an interview of a ‘market expert' without independent reflection can result in serious financial harm. Developing a true insight on a company and assessing the probability of success requires careful examination. Most of the opinions voiced by one's acquaintances are not based on thorough study or sound logic and a moment's reflection can lay bare their recommendations. Implication for investors is that one should avoid acting on tips and never allow others to do the thinking on their behalf.

One of the insights from behavioural finance is that losing Rs.100 is nearly twice as painful as gaining Rs.100. This corroborates with our personal experiences — we remember the harm that somebody has caused us rather than recall the many generosities someone has extended to us. Since the market movements in the short term are fairly random, probability of upside is equal to the downside in short time periods. Constant viewing of prices will show almost equal number of periods when the price moves downwards as it moves upwards. The periods of downside are likely to cause more emotional pain than the pleasure that one gains during the periods of upside. Normal human behaviour will be to reduce this emotional pain and sell during one of the periods of downside. Natural corollary of this behavioural tendency is to avoid looking at daily price movements and look at your portfolio only after a period of time, say on a quarterly basis.

When The Taxman Calls

Abhijit Bhave, CEO, Karvy Private Wealth

Simple framework - SLR-

It helps to build our investments on the SLR Frameworkor Safety, Liquidity and Returns. For an important near-term goal like making the down payment for your home, the investment would have to have high safety and liquidity and hence compromise on the return. However, for your child's education, which may be 10 years down the line, one should typically invest in equity instruments that offer compounding growth, higher returns and liquidity, but may inherently have more risk.

The essence of any financial planning exercise is to convert our life's dreams into financial goals and ensure goal-based investing to achieve these dreams.

The taxman comes calling - Make tax-smart investments

Ignoring the tax implications of a particular investment could reduce your returns substantially. Apart from the risk-return, it is equally important to know what your tax outgo would be before making an investment. For instance, an individual in the 30% tax bracket locking in money in a fixed deposit with 7.5% p.a. interest would give a net return of 5.25%. The same amount invested in a debt mutual fund would probably fetch a return of 8% p.a. and if held for more than three years, have an indexation benefit, thus reducing the tax outgo substantially. Similarly, equity (where returns are tax-free after one year), PPF, EPF, ELSS and NPS are investment avenues having greater tax-efficiency and hence higher returns.

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