My daddy can run 5 kms with ease, bragged Kaushik to his friend Dhiren. Dhiren was not to be upended by such trivia and promptly slipped the information that his father did the full marathon. This is common among children like them, one would think. But then, it is quite common with adults as well.
Some have honed it into a fine art that their bragging is honey smooth and one may not even realize that they are slipping promotional material below the radar. It can be anything from their cars, to their prowess with the opposite sex, their connections, their ability to pick up winning stocks etc. And talking about this ability, we tend to hear a lot about this from our clients.
Milind has made so much money in stocks that he was able to buy a house with the profits, Gopal wistfully told the other day. Good for him. Most people don’t reveal their mistakes; they only talk about their successes.
Gopal, my client, hence wanted to invest in stocks, first and foremost. He was not getting why we are not suggesting him stock investments for him. He thought if he comes to a Financial Planner, we will use our midas touch to make him millions. We had a lot of work to do.
Financial Planning is a blueprint to achieve one’s goals in the optimum manner. The important thing here is to manage cashflows properly and ensure best choices for the client, after considering the investment horizon, liquidity needs, stage of life of the client, their goals itself etc. Some assume that the best choice is the one that gives the maximum returns. It is not. However, one can make the correct choice from among similar instruments which may all be suitable and ensure the best fit in their situation in terms of returns, liquidity, ease of management, flexibility etc.
This ofcourse did not convince Gopal… he agreed that all these are important, but… what about shares? See Milind – how he has turned around his fortunes. Why don’t you chumps understand, he seemed to say. We got the hint. We had to address this now that we knew the planning process will otherwise not move forward.
Firstly, investing in equity is a high-risk, high-return proposition. The risks are high Gopal… you need to realize that. A stock that is seemingly doing well, may languish for any number of reasons. And it may crash, like it happened in case of SBI after the 99% profit plunge in Q4 results. It did not help matters that the provisioning was probably a one-off thing. Gopal would have fallen off his chair as SBI nose-dived 8% on a single day. The first thing then to appreciate is that the stock market is not some gravy train to Richie-rich land. There are as many pitfalls as there are opportunities.
Secondly, investing in stable, market leading companies is no guarantee of good returns either. Ask anyone who has invested in Reliance Industries and they would probably change the topic in a hurry and exit without as much as a good bye… for Reliance industries has given -13% returns, in the past one year. Does that mean Reliance is not good? Hardly. It is the biggest private sector company, has the largest market capitalization and is a company with huge potential. But when investing, mistakes do happen.
Now come to promising sectors. Microfinance was one such sector till about mid 2010. The industry went through a turmoil due to regulations on Andhra Pradesh and now Malegam committee recommendations. SKS Microfinance was a torch bearer. It had it’s own internal issues to exorcise as well. The upshot – the price is down over 70%.
Investors treat investing through IPOs to be a gilt-edged strategy. DLF & Reliance Power are prominent examples. One research showed over two thirds of the companies are quoting below their IPO price.
Ok genius, Gopal was saying… tell me how Milind made money? I told Gopal that Milind’s methods are a closed book to me. However, Gopal, in Financial Planning we look at equities only after covering the flanks.
The bedrock of the investments needs to be good debt instruments – like PPF, PF, FDs, Bonds and the like. That stabilizes the ship. The growth instruments preferred would be Mutual Funds. Gopal winced, as I never tire of mentioning this. The same thing allover again, his face said. I continued undaunted. Mutual funds offer unparalleled diversification as even a small sum of money invested in a fund would offer the same diversification as the entire portfolio. It is managed professionally, gives decent returns overtime & ensures liquidity – all this at a lower risk profile compared to Equity shares. The other cherished possession would be a home. As part of the Financial plan, that needs to be provided for too.
Now, when do you recommend Equities, Gopal wanted to know. I was actually coming to that. Equities are to be considered only after sufficient investments & security has been built through debt instruments, Mutual Funds and appropriate insurance. Then, Equity selection should be done to take exposure to specific companies that have good longterm potential. There is no point in buying index stocks again as they would anyway be represented to some extent in Mutual Fund schemes, in which one might have invested. Selecting promising sectors and investing in hand-picked companies hold promise. But in all these cases, one needs to give the investments time to bear fruit. Milind would have certainly given his investments time to bear fruit, I concluded. Gopal remained unimpressed. I was done. So, I suggested that we pop around to his favourite restaurant and have some pav-bhaji. Gopal brightened up immediately, he being a foodie. We walked with a song on our lips. Mine was – All is Well!
Article by Suresh Sadagopan ; Published in DNA Money on 24/5/2011
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