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  • Mr. Parag Parikh's thoughts on the behavioral aspects of investing...

    Parag's Views

    Mr. Parag Parikh's thoughts on the behavioral aspects of investing... and more!

    How not to be your own enemy

    All medicine bottles carry a warning regarding potential side effects. Rather than the positive aspects of its curative properties, we are fed the negatives. Ditto with mutual funds. Ads for these tax-friendly investment vehicles carry a warning: “Mutual funds are subject to market risk...” Retail investors are dissuaded with this statutory warning.

    Equity mutual funds are considered risky. This is a mental heuristic: the brain takes a short cut and does not process the complete information.

    This leads to biases, two of which dominate investor decision making: Availability bias and Representativeness bias.

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    Adieu... My Guide

    It is ironical that in a world replete with investment gurus vying with each other in the financial media, a true guiding beacon remains as elusive as ever. Many who embark on this quest, come across charlatans and end up poorer, both, in wealth and spirit.

    I count myself among the fortunate few to have avoided debacle. For this, I profusely thank my mentor, Mr. Chandrakant Sampat, who passed away yesterday, after having lived a life that many would consider an ideal one and yet not have the courage and fortitude to emulate.

    While I was acquainted with Mr. Sampat (Chandrakant Kaka to me and legions of his followers) for a long time, the first time I truly benefitted from his advice was when I was encountering an akward phase in my student life in the mid 1970s.

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    Equities can scare you, but will not kill you.

    After a long time we are witnessing and experiencing volatility in the stock markets. After a period of divergence, our stock markets are following several other markets, in experiencing a downtrend.

    Various theories are doing the rounds, myriad reasons are being put forth and extrapolations are rife. How nice it would have been, if we had only received such 'wisdom' a week ago. In reality no one knows what is happening or what is going to happen. So let us keep our emotions under control and stay invested.

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    Why most investors shun Value Investing?

    Why is Value Investing boring? Why do investors shun value stocks. Why do fund managers swear by value investing but are not able to walk the talk? It really requires a lot of courage and discipline to follow value investing.

    One of the main reasons investors shy away from value investing is that the stocks they consider have poor stories. The companies that show up on the screen can be scary and not doing well, so people find them difficult to buy. The depressed prices instead of attracting investors make them repel..

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    The burden of high expectations

    Charlie Munger has said that "The key to happiness is to lower your expectations." The present government of Mr. Narendra Modi does not have that luxury. The government has been voted to power under the burden of high expectations.

    If I had to characterise the budget presented by Mr. Arun Jaitley in one sentence, I would call it "An attention to detail budget." Various individual sectors, states, regions have been called out by name and the measures to address the problems pertaining to those areas have been sought to be addressed.

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    Open Letter to Mr. FM...

    Dear Mr. Finance Minister,

    There are tons of opinions out there as to what should be done. Here is one more piece on the same.

    1. Listen to the Prime Minister's campaign promise.
    Seriously. “Minimum Government – Maximum Governance” is what our country needs. Define what the government need to do. Things like Law and Order, National Security, Basic Education and Healthcare, Primary Infrastructure and so on. GET OUT of everything else. For instance, it is inexplicable as to why the Government should operate an airline or phone companies or petrol stations or 70% of the country's banking system. Getting out of unwanted sectors will give immediate benefit in terms of capital raising for needed expenditure and at the same time reduce the demands for subsidies and price controls. Ever wonder why people and MP's demand cheaper petrol but not cheaper cars? It is because PSUs sell the former and not the latter. Eliminate the Public Sector waste completely.

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    There is nothing like a Growth Stock...Don't be fooled by Growth Investing Strategies

    The markets are going up and with stock prices rising there is a scramble to find the next new idea. Now to satisfy this appetite fund managers are weaving new theories and stories to come up with fund offerings to attract investments in their funds. The race for asset gathering has picked up steam.

    The new fad doing the rounds is of “Growth”. Mutual funds have shifted their focus on coming out with “Growth Funds” comprising of growth stocks. I am quite amazed at such marketing strategies. What is a growth stock?

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    AUM ke liye kuchh bhi karega...

    The sentiment has started improving and the markets are going up. This is the time investors shed their fear and opt for equities. Equities over longer periods have always returned handsome returns to the investors. Equities are the best investment class for capital appreciation, dividends and hedge against inflation. The over optimism and the over confidence we see today can lead to investors turning greedy and ready to buy any stock.

    There are hounds waiting to capitalise on the greedy investors. At this time it is important to take some lessons from history. In every bull market it is common to hear "This time it is different". However over time we have seen that investors who turn greedy are soon parted with their money. Different themes and stories are woven to sell dreams to investors.

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    Why do IPOs come in Bull Markets?

    The election results are out and the markets are rejoicing. The stock markets are in an upbeat mood. Sentiments have changed and the investors are excited about equities after a lull for over five years. When investors are excited about equities there are people waiting to cash in on that investor greed. We would now see a host of Initial Public Offerings (IPO) hitting the market. We have seen a bear market in the last five years and have not seen any IPOs. Lets understand the psychology of IPOs and the stupidity of investors to chase IPOs.

    Why do we have IPO’s? Management wishes to raise capital from the markets for their ventures, offer stocks to the investors. Both parties benefit with the growth of the company and it is one of the cornerstones of capitalism.

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    Does Forecasting in the markets really work?

    Many a times when people ask me about how the markets would do, how a stock would perform, whether a sector will turn around, how the rupee will fare,what’s your take on the economy etc , I resort to a frank and an honest answer “Ask Bejan Daruwalla”. Forecasting the future really is the job of an astrologer. However in the investing world I have seen that analysts keep on forecasting in spite of our inability to predict the future. However still the forecasting industry is a highly paid industry and people go on forecasting and go on going wrong 90% of the time.

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    Mental Accounting: Dividend from Mutual Funds

    Mental Accounting: Money is fungible. That is Rs. 100 is equal to Rs. 100 only, not more nor less. However we human beings accord different values to the same amount of money depending on how the money is earned, the effort taken to earn, the quantum of money in consideration and the source of the money. To give you an example; Rs.5000 earned as salary has more value than Rs. 5000 earned in winning a lottery ticket. We are more likely to splurge on the earnings from lottery than on earnings from salary. We tend to separate Rs. 5000 in to two different mental accounts. Serious and hard work mental account for salary and free money mental account for the lottery. This mental accounting is responsible for a host of mistakes we make in our spending and investment decisions. Being aware of this will make us better and wiser decision makers.

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    How should an investor choose a good Mutual Fund?

    The idea of a mutual fund is very simple. Investors pool in their resources and the professional managers manage that money to give reasonable returns to the investors. The managers are the stewards of the monies entrusted to them. For the professional services rendered they are adequately compen-sated. However the managers rewards being linked to the amount of assets under management has created a big distortion.

    There is a race for assets under management. The basic idea of stewardship has been sidelined and asset management companies have become marketing organisations. The rewards of the managers are not dependant on the returns they create for their unit holders. A disproportionate returns to the managers without taking any risk, as against measly returns to investors who take all the risk.

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    Election Time: Voters need to know their Behavioral Biases before exercising their franchise

    Article by Rajeev Thakkar in Live Mint, April 25, 2016

    When the announcement for the Mumbai–Ahmedabad “bullet train” was made in the Railway Budget of 2016, a lot of people wondered aloud whether this was the best use of money in railways and that some other projects were probably would be a better use of the money.

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    Lessons from past bank troubles

    I am no political commentator nor do I believe in giving political discourses to others. Being a student of Behavioral Science I have been keenly watching the ever changing political scenario in our country in view of the elections. There are a few biases I thought would help the voters to understand their own follies and make meaningful decisions. We have a mind and a heart. We are supposed to make decisions with our mind but when we get carried away by emotions we make decisions out of our heart. Such decisions may not be rational and in our best interest.

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    FIIs buying: Don't be unduly excited about markets

    The equity markets have been flat for over five years and now we see some movement. The long wait seems to be behind us, as investors are rushing back to stock markets. Fear of poverty has given way to hope for riches. Nothing has really changed in the last two months on the economic front or at the corporate level. On the contrary with elections round the corner uncertainty has increased and stock markets hate uncertainty. But still the stock markets are reaching new highs. Data shows that the FIIs have been buying. On this logic investors are rushing to the markets. The sentiment has changed. Investors have become bullish on the hope of BJP forming a government which would add stability and a refreshing change from coalition politics.

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    Why you must be a long term investor?

    March 4, 2014
    With the elections drawing near and the political fights becoming fierce we see fluctuations in the stock markets. Swayed between greed and fear volatility in-creases and is here to stay. People are worried as to what will happen to the markets. Will it go up or down. They wager their bets on which political party will win and how would that impact the markets.
    I would call this as the noise of the markets. It tends to distract you. Frankly no one knows what is going to happen. It is all guess work. However it is impor-tant for you to know some time tested wisdom of investing.

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    Myopia: an overt focus on the short term

    December 30, 2013
    One of the barriers that prevents investors from acting against bubbles although they are aware of it is myopia; an overt focus on the short term.However this tendency to think short term is inherent in human beings. It is the most distinguishing factor that separates successful people from unsuccessful people. Investors today appear to have a chronic attention deficit hyperactivity disorder (ADHD) when it comes to investing.

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    Investor Education Initiative: Why NFOs of Close Ended Funds are hot?

    December 9, 2013
    Markets are known to create fads and fancies from time to time depending upon the psychology of the investors.

    The latest fad is Close Ended Funds. Is it not surprising that all of a sudden these have become fancies and big fund houses have been lining up to launch close ended funds. One fund house after an initial success has immediately launched series 2 to gather as much money before the others get in and the fancy ends. Herd mentality is at work.

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    Why Parag Parikh Flexi Cap Fund?

    November 6, 2013
    An equity mutual fund's portfolio is often described as a collection of stocks which are invested in a certain proportion keeping risk and liquidity considerations in mind. While this appears simple enough, over the years, the industry has complicated matters and confused investors by needlessly segmenting equity schemes on the basis of sector, theme, geography, market-capitalisation etc. In my opinion, these self-imposed silos are more due to the marketing team's demands rather than the investment team's desires. After all, a true fund manager, should be indifferent as to whether a stock is a large-cap or mid-cap one as long it complies with his / her investment criteria.

    I would prefer to define an equity scheme as a collection of good businesses rather than merely good stocks. If fund managers are able to identify such good businesses, they should have the freedom to add them to the schemes they manage. It is unfair to unitholders of a scheme to be deprived of a good idea merely because the scheme's mandate is so narrow that it does not permit its inclusion.

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    Overconfidence Bias

    October 7, 2013
    Overconfidence in investors can be hazardous to their wealth. What is overconfidence? It is when people feel smarter than they actually are. This overconfidence can be of one’s knowledge or one’s ability.

    What happens when overconfidence meets the market? Of course according to the classical economic theory no one is overconfident. In fact stock markets should not even exist if we look at the efficient market theory. Efficient markets assume that the price is right, then why should anyone want to trade. The volumes should be zero.

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    You are prone to useless information

    September 12, 2013
    A clever experiment was conducted by psychologists. There was a queue at a photocopiers shop. The psychologists tried to get a person jump the line on the following three excuses.
    1. "Excuse me , I have three pages. May I use the Xerox machines?" ( The no information case)
    2. "Excuse me, I have three pages. May I use the Xerox machine, because I have to make copies?" (Irrelevant or useless information: everyone in the line needs to make copies or they wouldn’t be in the line)
    3. "Excuse me, I have three pages. May I use the Xerox machine, because I am in a rush?"

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    Predictable Surprise: The National Spot Exchange Default

    August 19, 2013
    A smoker knows that smoking overtime would lead to cancer. However he goes on smoking till one fine day he is diagnosed with cancer. Similarly an alcoholic knows that excessive drinking can cause cirrhosis of the liver but he goes on drinking till he succumbs to the disease. Does it surprise anyone? No because these were predictable surprises. Primary consequences were pleasure and secondary long term consequences were pain.

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    Buying a Business or a Stock?

    August 13, 2013
    The other day I was at the club and happened to meet one our investors in the Parag Parikh Flexi Cap Fund. Having seen the fact sheet he asked me “ What do you think of ICRA? Not ICRA the business but ICRA the stock. “Where do you see it by the end of this year?

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    Why Equities are still the best investment opportunity?

    August 5, 2013
    Since the last five years, the stock markets have been flat and have provided no opportunity for investors to have any returns. It is but natural for investors to be shunning equities at present. With the volatility and the depressed conditions investors are preferring to keep their money in cash or absolutely safe fixed income securities. The charm of gold which existed last year has also faded. Real estate is also not as one would call a secured investment either. How do you turn it in to a pile of cash to meet your retirement needs?

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    Distinguishing the Signal from the Noise

    August 2, 2013
    When it comes to investing investors seem to be addicted to information. The whole industry seems to be obsessed with learning more and more about less and less until they know everything about nothing. How much information do we actually require to make an investment decision? As Daniel J. Boorstin opined, “The greatest obstacle to discovery is not ignorance - it is the illusion of knowledge.

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    Are you using the right Anchor?

    July 24, 2013
    This morning a client of mine phoned me and complained regarding his portfolio doing poorly when the markets are at an all time high. He doubted the choice of his stocks and this doubt increases when someone else is managing your portfolio. I am sure most of you must be suffering from the same anxiety.

    Now when you say the markets are up what is the yard stick you use? Off course it is the BSE Sensex or the Nifty. When these indices go up it is widely reported by newspapers, TV channels etc. that the markets are up.

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    Risk/Volatility

    July 13, 2013
    The current state of the stock markets is in a depressed mode and everyone is shunning equities. News paper reports, TV shows, business magazines add to the availability heuristic of depicting the equity investments in poor light. This recency effect has made equities a risky proposition for the investors. Let us analyze our biases and see if this is true.

    In this age of information with the click of a button we have to be vary of the sheer loads of irrelevant information that is imposed upon us. However do we really know the type of information we need to make a good decision? Say for instance a pharma analyst. He would know all about the different drugs, their formulations, their uses, the names of the competitors and the works. But does that mean that he knows how to value a pharma company? Well my experience says no. We are bombarded with all such information in the guise of knowledge. But that is not the right fodder for making informed decisions..

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    Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
    © PPFAS Asset Management Private Limited. All rights reserved.
    Sponsor: Parag Parikh Financial Advisory Services Limited. [CIN: U67190MH1992PLC068970], Trustee: PPFAS Trustee Company Private Limited. [CIN: U65100MH2011PTC221203], Investment Manager (AMC): PPFAS Asset Management Private Limited. [CIN: U65100MH2011PTC220623]