Do you invest for Applause or Returns?
Recently, while waiting at the metro station, I had an opportunity to talk with a young man who had an attractive engineering degree from a reputed university in India, and masters done from a top-notch business school in Australia. While trade experts talk high about the new opportunities in the job market, this young man had no job. I was more upset at his reply that he was not applying for jobs at all as he is waiting for the right opportunity in his dream profession. He has also been overlooking suggestions from his friends to join a global company. When it was time to board the metro, we shared our contacts and bid adieu.
Isn’t going with the crowd the safe option?
A response from this young chap moved me into deep thought. Many clients raise an inquiry quite often in a similar line while discussing on personal investments. Isn’t going with the popular investment model the safe option?US House Bubble: Do you remember the US house bubble of mid-2000s? Robert Shiller’s projection of home prices in the USA showed an increasing evaluation of property value by 0.4% every year from 1890 to 2004 and created a high demand for real estate in the US. Banks were offering loans at historically low-interest rates. Everyone wanted to own a house and lent huge sums from various banks. High demand for real estate and the availability of bank loans at low-interest rates resulted in dumping the homeowners in negative equity. The mortgage debt went higher than the actual value of their property. Those who projected this earlier with the proper data calculation escaped cleverly from the sub-prime crisis. Do you invest in a scheme because your friend, your colleague, your neighbor, or relative is investing or talking high about that particular scheme?
Warren Buffett very aptly quotes, “Beware the investment activity that produces applause; the great moves are usually greeted by yawns”.
ULIP season in India without any reason: the Year of 2007 was the season of ULIPs. Yes, a large insurance company launched a ulip scheme. Groups of agents decided to make huge money by misselling the scheme. They have created projections like if you invest Rs.10000 for 3 years, end of 10th year you will get 3 lacs. Some agents went a step ahead and told investors that in the 10th year the investors will get 10 lacs. If a lie is repeated ‘n’ number of times by ‘n’ number of people it will appear like a truth. Based on this illusion the ulip season made many agents richer and also made them win many foreign trips. But now investors realized that they should not have fallen prey for ULIP season. Instead, they could have analyzed the reason. It would be best to be careful while considering the investment model that gets highly appreciated. When a particular investment strategy is applauded highly, it pre-occupies your mind completely and makes you fall victim to counter-productivity. You miss to analyze the pros and cons or examine the results. Sometimes you tend to choose the model that doesn’t suit your requirement or earnings. People yawned at the person who discovered and told the earth is round. Investors yawned at warren buffet when he didn’t participate in the tech rally in the late 90s. Great ideas will not be appreciated at first, it will be yawned instead. Also, people will appreciate smart investment options but will yawn at the disciplined investment approach. But the disciplined approach pays more than the so-called smart investment options.
Is approval from the crowd necessary while taking investment decisions?
Do you expect people around should approve your investment decisions? Do you reject an investment because they reject that scheme? Just listen to the theory of Benjamin Graham, whom Warren Buffet considered as his guru, here. “You are neither right nor wrong because the crowd disagrees with you. You are right because your data and reasoning are right”.If you are habitual in seeking permission or approval from your circle for making investment decisions, it is time to change the habit now. If you are not familiar with some business, you do not have to necessarily buy stocks from that business. Unless you understand how the business works, you won’t be able to figure out the performance of the model in the future. Just because your friends or some experts say investing in a particular model is the best, do not put your hard-earned money on it. You may not be able to understand or follow the course of the plan. Remember, seeking help from your friend who suggested the plan is also not feasible all the time. Likewise, when you have decided a particular model after figuring out various options and analyzing the data, do not step back just because someone is saying it is not good.
Months later, I was surprised to receive a call from the young man whom I met at the metro station. Within 2 months of joining his dream job, he had earned 1.2 times compared to what he would have earned in six months if he had joined a company suggested by his friends. Do not wait for approval from the crowd. Follow your instinct while investing, of course, which is backed up with the right data and reasoning.