He insisted that I take a look at his portfolio. Unless it is a close friend or family, I refuse to get into the micro decisions of what to buy, sell or hold. As expected, there were a few loss-making IPOs, some good, and some not-so-good stocks. I suggested he simply buy the Nifty ETF instead. He felt disappointed. We began talking about his portfolio and how he had built it over time. He excitedly explained how he had made money on some of his picks. He underplayed the losses, but these did nag him. Then I caught the trait that, I believe, drives most investor decisions—choosing the right stock is not as important as missing out on what seems like a good opportunity.
An investor does not begin with the intent of being careless about his money. He wants to deploy the money carefully, and make profits, periodically monitoring his choices. However, the actual process of choosing where to invest, and which stock or funds or bids to buy, is waylaid by the anxiety about not missing a good opportunity to make money. It is this weakness that is exploited in the marketplace.
A previously unknown name is suddenly in the news as ad spends are increased before the IPO is launched. Companies are able to allocate expenses for this activity and push positive news about the forthcoming issue of shares. Even if there is criticism, analysis and adequate cautionary warnings, investors are only evaluating if this is too good an opportunity to let go.
Their evaluation is typically weak. If the IPOs that came before this one have listed at a premium, this information alone is enough to glorify it as a great opportunity. Subsequently, there is an IPO frenzy, wherein everything on offer is lapped up. Investors discard every shred of rationality to join the bandwagon. We have seen many such cycles, but investors operate with the desire to be a part of the next big thing in every cycle.
We have had incidents of fleeing finance companies that mobilise investor deposits. The modus operandi primarily focuses on pitching the deposit as an extremely attractive proposition that should not be missed. The interest rates are high, a local man is appointed as branch manager, and there are investors who have received and encashed interest payments. Investors rush in, staking large sums, sometimes their entire life savings, so that they do not miss the opportunity to make money.
High net worth investors are no exceptions. Investment schemes are created with the tag of being exclusive. They love the idea that a portfolio has been curated for a select group of people. The idea that this investment opportunity is not available to others makes it attractive for them. The stories of losing money to such dubious investment ideas in stocks, derivatives, private equity ventures, and many exotic combinations of the above, are privately rued by the rich.
We have just completed a sales cycle of online shopping frenzy, where the best discounts were on offer. The seller was only taking advantage of the buyers’ sense of urgency to get the best deal. This auto feedback cycle enables discounts, which are but sales volume benefits that the seller splits with the buyer. Do not miss this opportunity, is the credo. Properties are sold with the tag, ‘by invitation only’.
Timeshare holidays are sold as offers expiring ‘very soon’. As long as something is framed as an opportunity that should not be missed, there are buyers waiting in line.There is truly no scarcity of investment opportunities. Entrepreneurship is not an activity with time limits. There will always be a set of good stocks to buy and propositions to evaluate. Even entrepreneurs face this dilemma between business strategy and opportunity. Grabbing what is seen as a unique proposition is more attractive than sitting down and making a business plan, figuring out how to fund, operate and market a business.
Strategy is seen as boring by many. By itself, strategy won’t take a business or an investor too far. Strategy needs to be combined with timely action, the motivation for which tends to be something attractive, but timebound, calling for immediate action. Most of our decisions suffer this behavioural limitation. What can we do?
First, frame the principles that will guide any investment decision. Anything you do must satisfy this criterion. This discipline is developed with practice and conviction. If we pause to consider that we don’t have to deal with the markets that still evade the law and deal in cash, we won’t be buying those second and third houses, and suffering poor construction, and unbearable time overruns. We can learn to play by the rules that appeal to us and define our investment approach.
Second, resolve not to be pushed into making a decision. Anything that is positioned as ‘do it now, or it will go away’ must be viewed with caution. Good quality investment returns are boring and happen over time. Buying businesses and funds with track records of performance is always superior to trying something new. Don’t use new offerings as your shot at entrepreneurship and risk-taking.
Third, minimise what you allocate to these ‘not to be missed’ opportunities. One of my banking friends took voluntary retirement and staked his retirement proceeds in PSU bank stocks. I know the business very well, he said. What he relied on was the fact that the government won’t let banks fail. Remain wary of these one-line strategies that stake everything based on a single premise. If you must, invest a small amount so you don’t get hurt.
My friend had just begun wondering why I was proposing the Nifty. Aren’t these the same boring stocks, he asked. His sonin-law joined in and said, “I invest every month in the Nifty. Whatever balance I have at the end of the month, I swipe it into the index, so that the money doesn’t remain idle,” he said. Our man was immediately impressed and was ready for action. Such is the lure of positioning. We have to see something as an opportunity and feel the need to be included. We can’t stop ourselves from acting on it then.
(The author is CHAIRPERSON, CENTRE FOR INVESTMENT EDUCATION AND LEARNING.)
(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)