Investment articles

What do investors believe they can do but they can’t? (Part 1)

 

The author Joe Wiggins says that poor investment decisions take place when our expectations of what we are capable of exceed the reality.

Following are a few situations of what we think we can do, but probably can’t:

  • Timing the markets: many investors try to predict what will happen, and when will it happen in the stock market. The ‘when will it happen’ part is considered as timing the market. The stock market is considered as a complex, adaptive and a chaotic system. Forecasting ‘when will it happen’ is very difficult and usually can’t be done accurately. Yet, investors think that they can do it and continue to do it.
  • Truly understanding complex funds: Many funds are complex in nature. Such funds promise high return with low, differentiated risks. Investors usually don’t understand the nature of such funds. Yet, they are attracted to the high return promises made by these funds and invest in them. They break an important rule of investing. Don’t invest in things you don’t understand.
  • Predicting Inflation: Macroeconomic variables are affected by many factors. One such variable is inflation. Inflation is usually affected by many factors. It is hard for an investor to predict inflation. The investor doesn’t know which all factors are playing the role at a given time. Hence, the investor won’t be able to predict the inflation estimates accurately.
  • Pick funds that consistently outperform: A myth in fund investing is that any manager or strategy can consistently beat the market. Even a skillful fund manager will underperform for prolonged periods. Many times, we fail to realise this. Due to this, we get trapped in a painful cycle of selling losing funds and buying yesterday’s winners.
  • Withstand poor performance: Weak performances are almost impossible to avoid for any strategy, fund or asset class. These scenarios are easy to deal with in theory. But in practice, the experience is entirely different. An investor can have stress, anxiety and doubts during difficult periods. An investor may feel that a poor performance can be completely avoided throughout the life of the investment process. This leads to making poor decisions at just the wrong time.

 

Source: behaviouralinvestment.com

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

How to Invest during High Inflation period?

 

Before we answer this question, let’s know how exactly does inflation affect investing:

How does inflation hurt?

In an inflationary environment, input costs for product-based businesses rise. Therefore, businesses have to increase the selling prices of their products. The end consumer ends up paying a high price for the same product which used to cost less before. Else, the business can keep the prices same and reduce the quantity of the product. Here, the consumer pays the same price, but for less quantity of the same product.

If the prices remain inflated for a prolonged period, it starts affecting the purchasing power of the consumer. It affects the demand for the company’s products. Sales volumes of the companies reduce. The company’s future growth is also negatively affected in such an environment. This has negative effect on its stock price, thereby reducing the returns for its investors.

Is there any way to invest in such an environment? There is! Let’s look at it:

  • Service based companies may not be affected by high inflation. Eg- Software companies.
  • Some companies can increase the selling price and still retain demand. Such companies have a good pricing power.
  • Some companies sell luxury products at very high prices. The demand for their products remains constant even if they increase the price of their products. That’s because their customers are not affected by inflation as much as the common man.
  • Some companies come under the category of consumer essentials. Their products are essential in the day-to-day life of their customers. The demand for such products doesn’t go away.

An investor can look for such companies that provide these products/services. They can invest in these companies even in a high inflation environment. An investor should keep it in mind that this environment doesn’t last for life time. But the stock prices may decline during such an environment. An investor should use this opportunity and invest at low prices in companies with sustainably growing businesses.

 

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

Is recession round the corner? Don’t Panic!!!

During a recession, we experience an economic slowdown which leads to market volatility. But, there’s a wrong assumption that every stock experiences only losses at this time.

Let’s look at a few sectors that have performed well during a recession historically.

Consumer essentials

No one stops brushing their teeth or washing their clothes even during a recession. Stocks associated with FMCG products like toothpaste, soaps, shampoo, detergent, etc continue to make revenues. Sure, the frequency of such purchases might decrease, but such activities don’t come to a halt.

Discount retailers

As the population’s income declines, they start preferring inexpensive items. After all, consumer staples and essentials need to be purchased from somewhere. Thus, supermarkets, discount, and grocery retailers continue to make some revenue during this period.

Alcoholic Beverages

The demand for alcoholic beverages is almost unaffected by economic cycles. Since the demand remains similar, revenues and profits remain similar too.

Cosmetics and Apparel

While we may think consumer discretionary spending reduces in recessions, the apparel, and cosmetic sector witnesses a rise based on an interesting theory called “The Lipstick Effect”. According to this theory, people prefer treating themselves with small indulgences in periods of stress. Larger indulgences seem expensive; hence they move towards smaller items like lipsticks and clothes.

While we speak about these sectors, it’s important to understand that no business can be completely unaffected by the impact of a recession.

Every stock has a company behind it. And if companies make losses, it will directly or indirectly affect their stock price.

We, at Asset Multiplier, try to protect the principal capital of our clients in such volatile markets. We can help blunt the blow of recession by balancing your portfolio.

Happy Investing!!

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

Luck vs Skill in Investing

 

Luck and skill play a part in investing. But the author Mr. Jeremy Chia says that many of us attribute our poor performance to luck and good ones to skill.

So, let’s learn more about luck and skill, shall we?

Understanding luck:

In a world full of unknowns and wide range of possibilities, luck plays a significant role in the final outcome. More than we want to believe. This wide range of possibilities can be seen in the profession of investing. Short term prices are volatile and random, and are influenced by luck. The long-term prices are also influenced by luck.

Long-term stock prices tend to be around the present value of the company’s expected future cash flow at the given time. The future cash flow is influenced by many factors. They result in a range of different cash flow possibilities. On many occasions, the market may also misprice certain securities. Hence, we should acknowledge that when it comes to investing, the future is not certain. There always will be a range of different possibilities.

Identifying skill

The next step is to separate luck from skill. Skill in investing is hard to quantify. We need to analyse a sufficiently long track record. An investor can outperform his peers for decades rather than just a few years. Then the odds of skill playing a role become significantly higher. Warren Buffett may have been lucky in certain investments. But no-one can deny that his long-term track record is due to being a skilful investor.

How to identify?

Focus on the process. Analysing an investment manager’s process is a better way to judge the strategy. Compare his original investment thesis with the eventual outcome of the company. If they matched up, then the manager may by highly skilled in predicting possibilities and outcomes. Find a larger data set. Your investment strategy may be based largely on investing in just a few names. Then it is difficult to distinguish luck and skill because you’ve invested in only a few stocks. The sample is too small. But if you build a diversified portfolio and were right about the investments, then skill was more likely involved.

Our investing success comes down to both skill and luck. Hence it is hard to separate luck and skill.

 

Source: thegoodinvestors.sg,

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

Do market crashes hurt us?

Stock market shocks or crashes are part of market life cycles and market shocks are unavoidable. The market also needs some correction after a big rally, but honestly, as an investor, we need not worry about them. In the market crash, our portfolio also crashes but all of those are unrealized losses. Our investments only convert into losses after we sell them in the losses.

Source – Chartink.com

The above picture is a witness of how the market has recovered after the market crashes in 2008-09 and 2020-21.

During the market crash, everyone has the same question which is “What do we do now?” the simpler answer is, to do nothing, all we need to do is while investing. If you believe in your investment strategy, don’t need to change it, people sell in panic and often regret their decisions. “Nothing lasts forever”.

But we all know it’s not easy to watch our investment portfolio fall continuously along with the market but we can control the damages by taking some easier steps, so let’s discuss these steps.

Start early – Early investments helps to create higher wealth and compound your wealth rapidly. It gives more time to grow your investments and keeps you disciplined about your investment decisions. If your investment span is 20-25 years then 2 or 3 market crashes don’t affect your portfolio value.

Diversification“don’t put all your eggs in one basket” is an old saying on the street that simplifies diversification. If our portfolio has huge exposure to one specific stock or sector then no one can save us from the concentration risk. If something went wrong with that particular stock or sector, our overall portfolio value will come down even if the market is performing better. While investing, we need to be sure that we do not invest a large chunk of money in a specific stock or sector and that our portfolio is well diversified. The over-diversification also hurts us as we add so many stocks from different sectors it is difficult to keep a track of all. Often our decisions go wrong.

Investment in fixed income securities – Like the diversification in sectors and stocks, we need to diversify our investment portfolio with investments in the different asset classes. While equity markets are struggling for most investors, fixed-income securities are safe houses. As the name fixed income securities suggests, they give you a fixed return on your investments. If you invested in both equity as well as fixed income securities your losses from the equity are set off by the returns from fixed income securities. In fixed-income securities, you can invest in corporate and treasury bonds and Bank deposits.

Avoid panic selling – During the market crash, negative news and bad sentiments influence many investors to get out of their investments even in the losses. After every crash markets have recovered. Because of some short-term challenges, don’t change your long-term strategies and be invested.

Good opportunity to buy? – Lower and discounted prices look tempting to buy and average out your investments but not every discounted price needs to be a good opportunity. Avoid panic buying. But market crashes allow us to add good stocks to our portfolio as most of the good stocks are traded at lower prices. Here we can use a staggered way of investing, we do not invest all our money at once we should make systematic plans to invest for when to buy and how much to buy because no one knows where the market is heading.

If we stick to our long-term investment strategy and avoid some silly mistakes the market crash doesn’t hurt more.

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered investment advice or research recommendation. The users should rely on their research and analysis and should consult their investment advisors to determine the merit, risks, and suitability of the information provided.”

How do Interest Rates affect Stock Valuation?

The central banks around the world are raising interest rates to reduce inflationary pressures. But do these rising rates affect stock valuation? Let’s find out:

A change in the interest rate changes generally impacts the stock market immediately, whereas, for the rest of the economy, it may take about a year to see any widespread impact. Although the relationship between interest rates and the stock market is fairly indirect, the two tend to move in opposite directions.

Companies that have borrowed debt will experience an increase in borrowing costs. This will impact the profits and cash flows of such companies. This in turn will negatively affect their stock prices. Higher interest rates will increase the fixed income yields and make them more attractive. Stocks would now require a higher rate of return to compete with these higher-yielding instruments.

Higher interest rates tend to negatively affect earnings and stock prices (with the exception of the financial sector). In theory, higher interest rates impact high-growth companies more than low-growth companies. Most of the current value of high-growth companies is derived from cash flows generated much later in the future.

But there are still 2 reasons to stay invested in high-growth companies:

  • Many high-growth companies are capable of providing a higher rate of return even if interest prices keep on rising.
  • Interest rates tend to impact valuations only temporarily.

The central banks can’t keep on raising interest rates forever. They reverse the rate change once the monetary policy measures taken are effective enough. These are short-term changes and shouldn’t affect an investor if it’s a long-term investment. Once the central banks announce an interest rate cut, the assumption is consumers and businesses will increase spending and investment. This can cause stock prices to rise.

What to do in such situations?

Instead of being worried, one should stay invested in companies having good long-term growth potential. Investors should invest in companies that have low or zero debt. Low debt companies can service the debt even if the interest rates go up. An investor should focus on the quality of the business. Good quality businesses can do well even in a high-interest rate environment. Understanding the relationship between interest rates and the stock market can help investors understand how changes may impact their investments. They can also be better prepared to make better financial decisions.

 

Source: thegoodinvestors.sg, investopedia.com

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

What if Stock Market Remains Closed Forever!

Mr. Jeremy Chia suggests that long-term investors shouldn’t bother even if the stock market remains closed forever. He says that even if we are never able to sell our shares, a truly good investment bought at the right price should still pay off over time. How? Let’s read:

An investor can’t sell the shares if the stock market will remain closed forever. Yet, the investor will remain entitled to future dividends of the company. The goal of a long-term investor shouldn’t be simply to sell off an asset at a higher price to a buyer. It should be to hold an asset for its cash flow creation capability.

Many companies are in different phases in their lifecycles. If a company is growing rapidly, it may not pay dividends. After some time, once it matures and it starts building up excess cash. It can then start paying dividends to its shareholders. But one has to remain patient for that. If the stock market remains closed forever, these patient shareholders will eventually start receiving dividends. These dividends will eventually exceed what they paid to buy the shares.

Therefore, an investor should invest in a stock after checking the following:

  • How much cash flow can the company potentially generate?
  • Can I receive back what I paid for buying the stock by simply collecting the cash flow over the years?
  • Will I eventually get more than paid for even if no one offers to buy the stock in the future?

If an investor has paid too much for the stake in the company, the investment may not pay off. Even a high-growth company may not generate enough cash to reward such a shareholder. In today’s market, many investors have bought a stock hoping to sell it to a “greater fool” at a higher price. They don’t buy it to benefit from the cash flow of the stock and are unlikely to make back their capital.

 

Source: thegoodinvestors.sg

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

Bear Markets- A test of Investors’ Emotions

 

During a bear market, your portfolio’s value is falling. You are receiving news highlighting the harsh realities of the stock market. It can become tough to escape the negativity that one feels. It is not just an uncomfortable experience; negative emotions affect one’s ability to make rational decisions.

There are 3 ways in which emotions can materially affect an investor during a bear market:

  • Emotions can affect rational decision-making: Emotions may impact rational decision-making and lead us to irrational decisions. Elements that affect investors in such cases are powerful images and stories that amplify the emotional response. Fear and sense of increased risk will be increased due to anxiety and panic of other people.
  • Emotions can lead to short-term decisions: Severe negative emotions make investors vulnerable and drastically reduce their decision-making time. Acting rapidly to respond to strong emotional cues is clearly a natural instinct many times. But it impacts their ability to withstand tough periods in the market or to invest for the long term.
  • Emotions can make us ignore probabilities: In a bear market, one’s fears increase by the stories of how much worse things will get. Provoked emotions make one far less sensitive to changes in probability. The ability to reasonably assess the probability of future developments gets severely reduced. The strength of feeling outweighs the strength of evidence.

 How to reduce the influence of emotions?

  • An investor should remove oneself from the emotional stimulus. Turn off the financial market news and check the portfolio less frequently. Long-term investors should not do things that would provoke a short-term emotional response.
  • One should never make in-the-moment investment decisions. These are likely to be driven by how one feels at that specific point in time. One should always step away and hold off from making a decision. Reflect on the decision with a calm state of mind.

These aren’t solutions as one cannot disconnect oneself from the impact of emotions on investment decisions. However, one must be aware that the negative feelings of stress, anxiety, and fear that one experiences during a bear market. These may encourage some of the worst behavior and one must do the best to avoid/reduce them.

 

Source: behaviouralinvestment.com

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

Is there any easy way to pick quality stocks?

After completing your education, you started working and realise a portion of your earnings needs to be invested in equity markets to earn returns. One glance at the media, and you realize equity investing is just too complicated. How to understand the financial jargon, the never-ending ratios?!

You don’t need to have a very high IQ to make money in equities. But you certainly need to understand the basics of accounting to understand the business.

You must first identify a business.  A look around your house will give you different investment ideas. Start with your daily cup of tea or coffee, and you will find several businesses which you will understand.

Once you have identified the business, you can have a look at the information published by the company – website, annual reports, and corporate presentations to understand the business.

Once you have a fairly good idea of the factors that influence the business, you come to the financials. The Holy Trinity of Profit and Loss Statement, Balance Sheet, and Cash flow statement. Each of these will tell you different information. The profit and loss statement will help you understand how the company makes money, its expenses, and its profitability. The balance sheet will explain how well the company is utilizing the funds invested by shareholders, and the cash flow will answer the most basic question – does the business generate free cash for shareholders?!

Analysts can derive any number of ratios from these statements which can be difficult to interpret. Understanding the basic ratios to compare two companies within a sector is critical. One search on Google can help understand some of the basic ratios.

In addition to the financials several qualitative factors aid decision-making.

  1. Management: The management will lead the company to achieve its goals and generate shareholder wealth over a long time. The information about the education and experience of management is available on the corporate websites. A LinkedIn search will help gather additional information about the previous experiences of the key managerial personnel.
  2. Promoter holding: Investors might prefer companies that have a promoter’s wealth tied to its success. There have been several cases where companies run by people who don’t have a financial interest in them have been mismanaged.
  3. Other factors such as a moat or competitive advantage of a company, demand for the products, or bargaining power with suppliers are some other factors that help understand a company better.

If you are someone who simply does not have the time to study accounting, it does not mean that you should not consider equity investing. You can hire SEBI registered Research Analysts who will do all the work and advise stocks that you can consider investing in.

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

Money related fears and how to conquer them

 

Mr. Hemant Beniwal says that ‘fear’ is a constant emotion among people that is brought up by money. This emotion influences our financial decisions. Following are the 5 most common money related fears and how one can overcome them:

1) Fear of losing all the money: Many people work hard to earn money and save it. But some end up losing money due to bad investment decisions. Losing all of their money is something that people scared of. Instead of having irrational fears, it is better to take small steps toward managing money. One can take help from professionals to invest the money. By doing this, one can become more confident of the investment decisions and not make big mistakes/losses.

2) Fear of never having enough money: People are always worried of outliving their created wealth, and that they will never have enough money considering medical expenses of old age. One should make a financial plan for one’s retirement goals and also consider the money needed to sustain the lifestyle and other goals post retirement. One should then work on executing the financial plan and review it regularly so that enough money is retained.

3)  Fear of making mistakes while managing one’s money: People are very scared to lose their hard-earned money, and hence let it lie idle in the savings account to avoid making bad investment decisions and avoid losing money. One should take steps to increase one’s investment knowledge, and first start with zero or low-risk investments and then riskier (volatile) investments. Help from financial planners can be used to match investments with the risk-taking ability from an emotional and financial perspective.

4)  Fear of financial identity theft: A lot of money-based transactions are done using of debit, credit cards, etc. which leads to the fear of account getting hacked or credit card duplication. This is not irrational and cybercrime cases are increasing. Don’t share usernames and passwords of online accounts with others, regularly check financial statements, update your contact number and address with the bank, and don’t click suspicious links. This can help you control the security of online financial transactions.

5) Fear of talking about money: People fear of losing money if they talk about it. They may feel that others have too much or too less in their comparison. But it is important to talk about money with trustworthy people like one’s parents, life partner as they may have gone through many situations at different stages of life. It is important to have frank and open discussions with one’s financial planner as it will make the financial plan realistic and help in achieving financial objectives.

Source- 6 Common Money Fears and how to Conquer them by Hemant Beniwal (https://www.tflguide.com/)

1) Many times, we have our own mental picture about saving money and using it. We should discuss it with more experienced individuals, read more articles on money management that can help in getting a better clarity about the mental picture.

2) We must not accept the status quo, neither must we be under the impression that we already understand everything that is there to understand about managing money. Keeping an open mind and a learning attitude can help us in taking better monetary decisions.

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”