Moving from savers to investors

Every time the market goes up all of us start investing into the market. Last quarter saw some very heavy investments. Now the market is down, with uncertainty about who would for the government in Delhi. Let me know frankly, how does it matter? It would matter in the short run, but in the long run, the markets would be up. So if you are investing for the long run this is the time. In every market cycle most of the retail investors invest when the market is up and actual investors invest in every market cycle, depending on the stock and not the market. This is the reason in the last article I had asked if one needs a financial advisor. A financial advisor would advise investing in the market based on the client’s goals and not the market cycle. What is actually happening is Mutual funds come with more schemes when the markets are up, as they are sure to get enough collections. Distributors sell these schemes saying you are getting the fund at a low NAV, price is good etc. The retail investor looks at the market and says yes currently the market is giving good returns for this type of investment and the investment looks safe or they look at past performance.

But the actual way for investing should be why am I investing? What is my risk tolerance and what is my return expectation. This is usually taken care by a financial advisor, who does Investor profiling, what are the investor’s goals or needs and then matches the product with the investor’s needs, goals and risk profile. The Market would continue to perform as always. The Mutual funds companies would then start concentrating on giving better returns and not on new products. SEBI has come with direct plans which help the investor save, but then this is only for an educated, well read and well informed customer. It is not everyone’s cup of tea to decide on where to invest. Some of their decisions might work in the short run.

Let us look at what happened in 2008, there was a meltdown in the US, nothing in India. But our markets fell, why? Just because the FII’s sold and took their money to the US. What did we do at that time? We also sold and are still scared to return to the stock markets. The FII’s returned and invested much more than they actually withdrew and are making money and we are still waiting. If during the melt down we had continued with our investment strategy based on our goals and risk profiles, we would have made much more money. But today the FII’s are making money.  The reason for us not making money is we do not believe in our stocks, but we are the same people who are buying the products made by the very same companies in whom we say we do not trust to buy the stock. We are contributing to the company’s profit by increasing its sales then why should we not participate in its growth and make money? Why sell a stock just because the FII’s have sold?

The other problem with us is we like to buy low and sell high. Remember good stocks will always be priced high. Their prices will be low only when there is distress in the market and when there is distress we just refuse to buy, even when we are getting a stock at a low price. Always remember, everyone buys a stock which is good, so the price will be high. Low price means low quality or the company is not proven. This is the reason why you will see that the FII holdings in good quality stock is high. Why do we refuse to buy into such stocks? You take any stock and check the price along with the dividends paid over 10 year period and you would have noticed that a good stock would have always gone up, irrespective of the market cycle. Take any 10 years period.

We are a nation of savers and not investors. Savings does not beat inflation. So let us slowly start upgrading ourselves to investors and make the money which is there to be made.

Does one need a financial advisor

In the past few post, I have always kept saying buy into equity. It’s easier said than done. There are a few challenges one of them is getting returns. There are many strategies followed by analyst to make money. Some follow the P/E route where they track the P/E of the NIFTY or SENSEX and decide if this is the right time purchase a stock. Some follow the Price to book value method. Some methods are good for some industries, but you just blindly follow the same method for all industries. P/E would be good for IT industry and Price to book value for banking, but these are just indicators. These indicators along with a bit of research should help you get a good price. Frankly there is no one best way by which you could decide if a stock is good. You should research and buy only if you trust the company. Just as you would do for any other purchase.

We keep saying invest in equity, but do not go by reports. That means sit and do research. If I have to sit and do research, then why am I working I would have been buying and selling stocks as a full time occupation. This is where financial advisors and mutual funds come in. They are in a specialized field, just as you are. Everyone has different skill sets, you make your money using those skills and the financial advisors help you make money using theirs. So when you make money for your skills, why should they not for their skills? We are ready to pay a doctor, why? Because we believe he has the skills, but we are not ready to pay a financial advisor.

This is because we have got into the habit of getting things free, but nothing actually comes free. It is a risk a person takes, this risk is a gamble. The problem started because many insurance agents or mutual fund distributors started mascaraing as financial advisors. They were and are more interested in your investment, so they give you free advice, which in most cases is in their interests. Some of them are good, because of their experience in the financial industry. You would have made money, where you could have made more if you had invested with proper advice. But the point is have you made enough to secure your goals?

Goals are something which should drive your investments and not just invest and hope you have enough at the end to meet your goal. Goal based planning gives meaning, purpose and focus to your investments. Some people have money falling on their laps, whereas for others they have to struggle for it. Why not meet a financial advisor and work with him to meet your goals and ensure a secure and peaceful life. Like they always say, Money is the cause of all problems, those who have it don’t know what to do of it, and those who don’t have it know what it means.