Financial Mistakes You've Made so far

Do You Need A Financial Advisor?

If you do your own investing, have you ever wondered whether you should turn things over to a  financial advisor?

When the Time Comes

Professional advisors say there is no magic asset number that pushes an investor to seek advice. Rather, it is more likely an event that spooks a person and sends him scurrying through an advisor's door.

• The event typically involves either the receipt of or access to a large sum of money that the individual didn't have before.
• When you reach a point in which you're constantly afraid that you're going to make a mistake with your investments, then you need professional advice.
• Often, someone who has never spent or managed more than a few thousand rupees is looking at managing six figures . If this happens to someone just about to retire, the decisions that need to made are more critical, as there's a need to make this money last. 

Judging Yourself

The need for critical self-evaluation is vital when determining whether to hire a financial advisor. The following questions should help you sort it out:

• Do you have a fair knowledge of investments?
• Do you enjoy reading about wealth management and financial topics and researching specific assets?
• Do you have expertise in financial instruments? Do you have the time to monitor, evaluate them and make periodic changes to your portfolio?

If you answered "yes" to the above questions, you may not need an advisor or financial planner. But if you thought "no"....

The Wrong Advisor

If your advisor only records some transactions from time to time but never sits down and discusses long-term goals with you, you may want to look for a new advisor. Similarly, if your advisor never writes an investment plan or strategy to lay out your needs and aims and assess whether they are being reached, you may be better served elsewhere.

A written plan for each client is critical.  In addition, good advisors  have semiannual conferences with clients and talk to their clients on a regular basis. In addition, a good advisor who is just beginning to work with a client should never recommend a product until he has learned a lot about circumstances and goals.

Finally, the individual should ensure that any financial professional has the proper credentials. Avoid any advisor who is little more than a broker or a distributor but calls himself a financial planner or advisor.

The Bottom Line

The decision about whether to seek advice can be critical. If you do choose to seek advice, carefully choose the right professional for the job, and you should be on your way to a better financial plan. If you decide to go it alone, remember if at first you don't succeed, you can try again ... or call an advisor.

BNP Paribas Feb 2018 Macro-Economic Dashboard

Disruption and opportunity

 key learnings from a Singularity University Summit*
- one broking head recently attended:

Singularity University, based in NASA Campus in Silicon Valley is the world's leading learning-cum-incubator university for innovation and technology set-up in collaboration with NASA, Stanford etc and we had leading Silicon Valley entrepreneurs presenting here including the guy behind Google Maps. I've come back with a mind-blowing experience.

OBSERVATIONS OF VARIOUS SPEAKERS THERE

We are witnessing the more disruption in human history over next 10-20 years than what we have seen in the last 20,000 years. Their prediction is that 60% of Fortune 1000 companies will be out of business in just next 10 years.

There is a convergence of exponential development & convergence of technologies and also business models across industries (Blockchain, Artificial Intelligence, Biotech & Genetics, 3D Printing, Solar Energy, Cellular Agriculture etc). These are no longer technologies in the lab, but are already commercialised. I'm convinced that for example Jiya who just turned 11 this month will never need to go to college or ever get a driver's license!

KEY actionable and insights for every business are 1. Organisations built for the 20th Century are destined for failure. Organisations built for efficiency and predictability will fail. They are unable to think and grow exponentially but are predicated on linear growth models. We all come from scarcity mindsets where is the world is moving rapidly to abundance. Ability to rapidly iterate, learn and execute will be required. Today's 18 year old has the ability to approach the same problem very differently and successfully.

2. People from completely outside the business will end up disrupting these businesses (Zerodha did it to broking businesses without any background).  Exponential is when you can deliver price-performance which is 10x better - not 20-50% better. There are several areas and technologies where price-performance is doubling every 12-18 months (Moore's law from Intel days).

3. Everything which is information based will priced at or move quickly to ZERO. They cal this "democratisation" of information (We are seeing signs of this in Equity Research, MF Distribution etc).  Entrepreneurs will have to work on alternative revenue streams. Huge implications for all our businesses. (Zerodha makes money from float rather than commissions). Move towards building platforms rather than products. (Google, Apple are platforms whereas Blackberry, Yahoo etc were products).

4. Everything is moving to a Service/Subscription model from a Sales model. Rolls Royce has moved to this model for their aircraft engines! They no longer sell engines. They charge for hourly use and provide analytics on actual usage to optimise for their clients.

4. Large organisations cannot change and do not have the time to change. There is an immune system response, legacy business becoming a barrier and hierarchical structures where anyone over 30 years of age today has very limited clue as to what is happening to the world which will prevent organisations from rapidly transforming.

5. The recommended solution for large organisations is to build teams completely outside their existing business
- which have NO people from existing businesses
- They are given he mandate to build a business model which completely disrupts our own existing business, leveraging these key trends
- to set up a multi-skilled team of 6-7 people which is under 35 years of age, NOT from the existing business or people who are the most willing to challenge status-quo
  - Housed independently with no corporate processes at all
- Working on lean startup principles (Design thinking/MVP/Agile)

If such a business turns out to be successful, do NOT bring it back into the Mother organisation.  Always keep it independent. In fact, make that the centre of gravity for building new businesses. (Unilever has implemented this globally and 5 of such initiatives/products have become the most profitable of all)

Framework for building Exponential Business Models

Each business needs to drop the vision, mission statement and have a simple Massive Transformational Purpose (MTP) that everyone in the team can understand and aspire to. For example Google has "To organise the world's information"

Businesses need at lease 4-5 of the following 10 things to create exponential growth.

S-C-A-L-E  &  I-D-E-A-S

S - Staff on Demand (Uber)(How many full-time employees vs Contractors) C - Community & Crowd involvement (Google Maps, Facebook, Quora etc) A - Algorithms (Uber - Matching drivers and passengers, Amazon - recommendations) L - Leverage existing Assets (AirBnB, Uber)(You must never own assets) E - Engagement (Contests, Gamification to driver user engagement)

I - Interfaces (Tech that allows external world to connect seamlessly and easily, example App Store) D - Dashboards (Real-time MIS on key metrics, knowing every key metric in real time) E - Experimentation - (Ability to constantly experiment, iterate and learn) A - Autonomy (How much autonomy to the lowest levels to decide) S - Social (How do you leverage social networks to listen, learn and engage).

Tax Impact Of Budget Provisions On Mutual Funds

There are certain amendments proposed in the union budget FY 18-19 with respect to investments in equity and equity oriented mutual funds. Find below the summarized note on each of the important point.

A) Updated Tax Structure:

The following is the updated tax structure applicable from 1st April, 2018

(For Resident Individuals / HUF)

Funds	Long Term After	Tax Applicability
		STCGs	LTCGs	Dividends
Equity Oriented / Arbitrage / Balance - Aggressive	1 year	15%	10% over Rs.1 Lakh * (without indexation)	10% + 12% Surcharge + 4% cess = 11.648%
Debt Oriented Liquid / Money Market / Balance - Conservative	3 years	As per Tax Slab	20% after indexation	25% + 12% Surcharge + 4% cess = 29.12%

Additional: Health & Education Cess of 4% + Surcharge based on total income applicable to Capital Gains.

* Cost as per fair market value / grandfathered upto 31st January, 2018.

B] Long Term Capital Gains (LTCGs)

The recent budget provisions have created some confusion in the minds of investors regarding taxability of mutual funds units, especially for equity oriented funds. Here is the some clarification for same.

Summary:

Any Long Term Capital Gains (LTCG) over Rs 100,000 per year on Equity Mutual funds will now be taxed at 10%. All gains until January 31, 2018 have been "grandfathered". So one can now assume that the new cost of holding your Equity Mutual Funds is the closing price on January 31, 2018. The start date of your holding remains the original purchase date for calculation of holding period.

Applicability:

Since the budget provisions are effective from 1st April, 2018, any transaction taking place till 31st March 2018 will continue to enjoy the existing taxation provisions. Thus, there would not be any LTCG (applicable on any sale happening on or till 31st March.

Grandfathering:

The grandfathering is a simple concept wherein the Finance Minister has given exemption of all notional Capital Gains earned till 31st January 2018. This means that for calculation of LTCGs, all gains made till this date will be exempted and not counted. As explained earlier, the tax computation will only be applicable by this method if the sale date is on or after 1st April, 2018 when the budgetary provisions come into effect.

Calculation for STCG:

The scenario for STCG calculation effectively remains the same as is currently in effect. The tax rate of 15% will continue be applicable if the sale happens within 365 days of purchase of the equities / units.

Calculation for LTCG:

For LTCG, the following is the calculation method:

Purchase price is to be considered higher of (a) and (b). (the idea is that only gains made after 31st Jan is taxable) .

a) Actual purchase price

b) Lower of ...

i) Fair market value (it is the highest price /market value as on 31st January, 2018)

ii) Full value of consideration (it is the actual sale price).

Examples:

1. Actual purchase price = 100. Market value on 31.01.18= 110. Sale price = 90. Then Fair purchase price = 100.

2. Actual purchase price = 100. Market value on 31.01.18 = 110. Sale price = 120. Then Fair purchase price = 110.

Exemption of Rs.1 Lakh:

Next, for calculation of final LTCG amount applicable to taxation, the exemption of Rs.1 lakh is applied. Thus if LTCG as per above is say Rs.1,20,000 then 10% on only Rs.20,000 = Rs.2,000 only would be appliable.

This is applicable irrespective of any purchase date and any amount of capital gains and is effective any sale made on or from 1st April 2018. For any sale date before that, LTCG is not applicable so the exemption amount is immaterial.

Scenarios:

	Case 1	Case 2	Case 3	Case 4	Case 5
Purchase date:	15. Jan. 2018	15. Jan. 2018	1. May. 2017	3. Mar. 2018	15. Jan. 2017
Purchase Price:	1,00,000	1,00,000	1,00,000	1,00,000	1,00,000
Value as on 31st Jan. '18:	1,20,000	1,20,000	1,75,000	NA	1,20,000
Sale Date:	25. Jun. 2019	25. Jun. 2019	2. Apr. 2018	2. June. 2019	25. Mar. 2018
Sale Value:	2,00,000	3,00,000	1,50,000	1,60,000	3,00,000
Fair Purchase Price:	1,20,000	1,20,000	1,00,000	1,00,000	1,20,000
Capital Gains on Sale:	80,000	1,80,000	50,000	60,000	1,80,000
STCG Tax	NA	NA	7,500 (15%)	NA	NA
LTCG Tax	NA (Less than Rs.1 L)	8,000 (on 1.8L - 1L)	NA	NA (LTCG < 1L)	No tax payable as the amendment is with effect from 01.04.2018

This is the clarification available till now. There are still more clarifications awaited which shall be received in days to come.

C] Dividend Taxation:

Dividends on Equity oriented Mutual funds now taxed at 10%. This provision had to come into effect since LTCG tax @10% is also imposed. Not doing so would have left a window to avoid LTCG tax by switching to dividend options.

This change will also be effective from 01 April 2018.

To assist you in understanding and calculating capital gains tax liabilities we have prepared a Capital Gain Calculator also, Click here to download it.

Model Portfolio Investing

Investors want many things — high return and low risk, low taxes, emotional stability, and some even want social status from their investments. But at their core, what investors want from their investments at a practical level is a mixture of hope for riches and freedom from poverty. There is a method to give you what you want as an investor that is simple, effective, time-tested and requires very little work on your part.
The approach to investing that gives you all of what you want is called structured investing using model portfolios. A model portfolio is a diversified system of mutual funds that are grouped together to provide an expected return with a corresponding amount of risk.

A model portfolio is an incredible way to help you get what you want as an investor. With a model portfolio, you receive:

1.  Market returns 
2.  Efficiency and effectiveness through passive investing
3. Time efficiency for you because on-going portfolio management (including re-balancing) is done for you 
4. Effectiveness because re-balancing is done regularly (studies show that re-balancing improves portfolio performance, especially when it comes to managing a portfolio's overall risk) 
5.  Consistency because a model portfolio investor does not change approaches when markets soar or dip.  

A Word About Risk and Returns

 Standard Deviation refers to how much a portfolio's return varies from its average annual return over a certain time period. The higher the number, the more ups and downs you can expect from a portfolio.As the SEBI warns, past results are no guarantee of future returns. However, standard deviation is useful because it gives us a way to quantitatively evaluate the past volatility of a portfolio.  

Market is probabilistic in nature not deterministic

The words investment probability theory might initially cause your eyes to glaze over with boredom. But I believe I can make it practical for you and we can learn important lessons from a basic understanding of investment probability.

One of my favorite sayings is “Anyone who tells you they know what the stock market will do in the short term is either a fool or a liar”. The market cannot be predicted on a daily, weekly, monthly, or yearly basis. This is NOT true for longer periods of time; but we will talk about that later.

Probability Theory

So how do some investment advisors correctly predict short term movements with accuracy? Let’s look at probability theory illustrated in a simple example. If you flip a coin you have 50% probability of heads and a 50% probability of tails. If you ask 100 people to predict the outcome of a single coin flip the probability is 50% will predict correctly and 50% will get it wrong.

Flip the coin twice and odds are only 25% of predictors will guess both flips correctly. The accuracy will fall with each additional coin flip. At the end of 10 coin flips the odds are only 1 out of 1000 will have predicted every coin flip correctly. Is that person the best prognosticator? These are completely random events and the odds were 1 out of the 1000 would get ten correct guesses in a row.

Investment Probability

Although the stock market is much more complex, the same concept applies to investment probability. Studies have shown that short term returns in the stock market are random, although with a positive bias. The positive bias is the difference between the coin toss example and the stock market; meaning there will be more positive than negative outcomes over time.

If you have enough prognosticators (and we do!); there will be a few who are able to successfully predict the short term moves in the stock market over several or even many time periods. Unfortunately, people begin to believe the stock market prognosticators are infallible, and more and more people follow their advice.

The more successful the predictions the greater number of followers. In addition to more followers, investors become more confident in their abilities, and make larger and larger bets. After all, the predictor has been correct many times; they must know more than anyone else? Of course, this is incorrect.

Inevitably the odds eventually catch up with the prognosticator. They guess incorrectly, and many people are harmed. But more damage can be done with a few incorrect guesses that all the correct guesses combined. That is because few are following when the prognosticator first starts making predictions. But at the end many people are following, and many will most likely be taking much larger positions than they were in the beginning.

Investment Probability and Value

It is easy to become lazy and attempt to follow an investment guru instead of implementing fundamental investing principles. But there are no short cuts in investing. Any investment philosophy that is going to make you rich quickly is a scheme that will end badly.

Fortunately, for those willing to develop patience and implement a long term investing plan, probability comes close to guaranteeing positive outcomes by focusing on valuation and investing for the long term.

A basic understanding of investment probability theory will cause an investor to ignore short term market prognosticators and focus on value. 

relationship between equity markets and bond yield

Bond yields are the key to calculating opportunity cost of equities 
Bond yields, in a way, represent the opportunity cost of investing in equities. For example, if the 10 year bond is yielding 7 % per annum then the equity markets will be attractive only if it can earn well above 7 %. In fact, equity being risky there will have to be a risk premium, first of all, to be even comparable. Let us assume that the risk premium on equities is 5 %. Therefore that 12 % will literally act as the opportunity cost for equity. Below 12 %, it does not make sense for the investor to take the risk of investing in equities as even the additional risk is not being compensated. The question of wealth creation only begins after that. As bond yields go up the opportunity cost of investing in equities goes up and therefore equities become less attractive. That is the first reason that explains the negative relationship between bond yields and equity markets. 
Bond yields are normally compared with earnings yield 
Bond yields are normally compared to the earnings yield. The earnings yield is nothing but the EPS / price of the stock. It essentially tells you what the share is actually earning assuming that you enter at the current price. A stock is attractive only if the earnings yield is higher than the bond yield. Otherwise, why should one take the risk of taking in equities? However, this argument is not always applicable. It is not applicable in cases where the company is loss making and the investors are buying stocks on expectations of a turnaround in the stock performance. There is another way to look at this. Earnings yield is the reverse of the P/E ratio which is a valuation matrix. That means if the bond yields go up then equity investors expect to be able to buy the stock at lower P/E ratios. 
Bond yields impact the cost of capital in valuing equities 
This is a very important relationship and causal effect. The yield on bonds is normally used as the risk-free rate when calculating cost of capital. When bond yields go up then the cost of capital goes up. That means that future cash flows get discounted at a higher rate. This compresses the valuations of these stocks. That is one of the reasons that whenever the interest rates are cut by the RBI, it is positive for stocks. Normally stocks tend to get re-rated as they will now be valued based on a lower cost of capital discounting factor.
 Bond yields impact colour of Foreign Institutional flows
 This is a very interesting relationship we have seen in recent years. When the bond yields in India go up, global investors find Indian debt more attractive in relation to global debt. This leads to capital outflows from equities and inflows into debt. In the last few months, we have seen outflows from FIIs in equities, but debt has continued to attract interest due to attractive yields. Of course, the domestic funds have been large scale buyers in equity and they have supported markets but that is a different issue altogether. The crux is that FPIs look at Indian equity and debt as competing asset classes and allocate according to relative yields. 
Bond yields impact financial costs.. 
Bond yields are very important fundamental factor that sets the relationship between bond yields and equities. When bond yields go up, it is a signal that corporates will have to pay a higher interest cost on debt. As debt servicing cost goes higher, the risk of bankruptcy and default also increases and this typically makes mid-cap and highly leveraged companies vulnerable. Bond yields have been typically used by analysts and investor as an important lead indicator to gauge the direction of equities. More often than not, it works to a T!

Q: There is another connection that is running between markets which is between the bond yield and equity markets. Explain why the equity market is so sensitive to the bond market yield? The moment the yield goes higher the market gets a bit nervous that is often seen as a negative for equity markets. How does that work actually?
A: There is clearly the relationship between equity markets and bond yield future returns are discounted using the 10 year bond yield as a discounting factor. And lower are your bond yields the better are the returns for the equity market and conversely in a high yield environment the future returns are much lower because bond yields are used to discount future returns. But intuitively that is just statistics, intuitively in a falling interest rate environment there is a direct impact on banks. Banks have some holding of government bonds in their portfolio therefore falling yield environment there are mark to market gains for banks on their holding of government bonds plus falling yields imply lower cost of borrowing for consumers and therefore higher potential that consumers are going to borrow more and spend more in the coming quarters.

Falling yields indicates that corporate borrowing costs are going to come down therefore companies are more likely to invest more in future project and therefore falling bond yields basically indicates that domestic demand is going to pick up in the coming quarters with better earnings are always positive for equity markets and therefore the positive relationship between falling bond yields and future equity returns. And yields of course are inversely proportional to prices therefore falling yields typically means that bond prices are going up.

Ten types of Indian Investors

*10 types of Investors in Indian markets!*

🔅‼️🔅‼️🔅‼️🔅‼️🔅‼️🔅‼️🔅‼️

*The Gold class* (Silent on Twitter, social media)– Age group 38-55 yrs- 100-200 crores in stocks. Self made wealth. Did 10-100x in few stocks. Investing since 2003 or earlier

*Honest beginner value investor* (usually silent on Twitter)– 50-80% of assets in stocks, usually 28-35 yr old, made some wealth (50L-2cr) in last 3-5 yrs, looking at building 5-7 cr portfolio in 3-4 years and leaving job.

*Typical Twitter value investor*-  Diverse age group, Asset allocation- 99% real estate (1-10cr), stocks- 1% – 1-10 lakhs. Whatsapp group name- Value investing. Discussion on- Intra-day trades, Futures, Options, Break-outs etc. Churns whole portfolio every week

*Smart Twitter value investor*-  30-40 yr old, 50% asset allocation in stocks- Sells all portfolio in demonetisation time. But keeps tweeting about value investing. After demonetisation market picks up- RTs old tweets of old stocks (in reality- could not buy them again as they have run away before he could buy again)

*Beginner, 25 yr old*- has no clue what stock market is about. Portfolio size 1-5 lakhs. Joins some groups etc to pass time. Primary motive from stock mkt- time pass & some thrill

*The SIP investor*– 30-55 yr old. Invests through SIP in Mutual funds. Doesn’t have a clue about stocks. Looks at stocks that go 10x in awe. Beginning to invest in direct stocks

*The F&O trader/Broker*- primarily gives tips on Nifty, Bank Nifty etc. Earns money via brokerage. Hasn’t made a penny in profits  (mostly losses) but portrays himself as a successful trader

*The Networked value investor*- Has networks with good stock investors. Doesn’t have a clue about value investing. Gets stock picks from others and talks about them with everyone else

*The Sleepy value investor*– a RARE breed-  Buys and holds 10-12 compounders for 3-5 years time frame (e.g pvt banks)

*The Break out value investor*– One who thinks buying break outs and value investing is one and the same! A very common breed!.

Three Investing mistakes to avoid

It’s good to learn from your mistakes. It’s better to learn from other people’s mistakes.— Warren Buffett

Investors spend a massive amount of time trying to make all the right moves. The collective effort dedicated to picking good stocks, managers, exchange-traded funds, and so on, is immense. There are countless books, magazines, newsletters, podcasts, blogs, television programs, and more dedicated to helping investors make the best possible decisions when it comes to selecting and managing investments.

Far less energy and commentary is committed to the topic of how not to make the wrong moves. Here, I’ll discuss three common mistakes, all of which I’ve made (and will continue to make) myself.

The three are related in that they are all behavioral issues that have been hard-wired into us over centuries. I’ll also share the potential consequences of these behav­ioral blunders and how you might be able to avoid them.

Mistake #1: Trying to control things you can’t

Countless factors drive global markets. Randomness rules, so predicting how these myriad variables will influence securities’ prices is impossible. Thinking otherwise is foolish. Deep down, we all know this, but we prognosticate nonetheless. What’s more, we have a tendency to think that we not only know how the future will take shape, but that we have some part in shaping it.

Investors cannot control the path of interest rates, increases in productivity, the level of a company’s stock price, and so on, but we often act as though we can. The illusion of control is pervasive. It is in some ways a form of self-preservation, and it’s been linked to positive mental health. But as inves­tors, it can be hazardous to our wealth.

The illusion of control can lead to overconfidence. Overconfidence can lead to overtrading. Overtrading will almost inevitably leave you short of meeting your goals.

While I could go on forever enumerating the things that we cannot influence, the list of those things we can control as investors is much shorter. The most meaningful levers we can pull to affect our investment outcomes are as follows.

1. Save. Sock away as much as you can. This is the investor’s equivalent of advising you to eat dark green leafy vegetables. We know it’s good for us, but we’d like it better on a pizza. The earlier we begin saving, the better, as it buys us more time for the magic of compounding to work in our favor.
2. Invest. This may seem obvious, but the biggest determinant of your investment success isn’t which stocks or funds you pick, or how you allocate your assets, but simply whether you’re in the market at all.
3. Allocate your assets appropriately. Asset-allo­cation matters, though it’s a distant second to simply being invested in the market. How you allocate your assets depends on your goals, your time horizon, and your willingness and ability to assume risk, among other things. Having an appropriate mix of stocks, bonds, and cash will do more to move the needle than trying to pick the best securities or managers you can find.
4. Minimize costs. Fees, commissions, taxes—every penny spent covering these costs is a penny that will not compound over time to be savored down the road. So spend every penny wisely.
5. Avoid taxes. Please note that I did not write “evade taxes.” While we can’t control tax policy, we can respond to it. Locating less tax-efficient assets (closed-end funds, for example) in tax-deferred accounts and investing in relatively tax-efficient vehi­cles (such as equity ETFs) in taxable accounts can help you avoid putting any more pennies into Uncle Sam’s pocket than you have to.

There are countless things investors cannot control, but we often kid ourselves into thinking we can. Avoid overconfidence by keeping this short list nearby. Give it a look the next time you think you know what the launch of the iPhone X will do for Apple’s stock price.

Mistake #2: Recency Bias

Recency bias describes our tendency to extrapolate our recent experience into the future. When my three-year old throws a tantrum, I tend to picture her as a grown woman kicking and screaming on the floor, even though I’m confident she’ll become a well-adjusted adult. Investors do the same. Stocks have been marching higher for the better part of a decade, so surely they’ll only continue to climb...right?

Recency bias can become particularly dangerous in bear markets. Falling stock prices can lead to panic selling, and shellshocked investors can be slow to get back in once markets rebound. There’s plenty of evidence that the psychological effects of the global financial crisis linger with investors to this day, as many of them have remained on the sidelines for much of the ensuing recovery. Remember, whether or not you are invested is the most painfully obvious determinant of your outcomes. Sitting out on a nearly decade-long rally has been a serious setback for many.

One of the bigger investment mistakes I’ve ever made can be partly attributed to recency bias. In February 2009, I bought shares of the paint, coatings, and chemicals manufacturer  PPG Industries. The market was near its nadir, and this was a highly cash-generative company that had consistently raised its dividend for decades, was in good financial health, but was clearly going through a rough patch (what wasn’t?). I saw this as an once-in-a-lifetime buying opportunity and acted on it.

One month later, I sold my shares. At the time, it seemed like the world was ending, I’d made a few bucks as the stock had bounced back, but it seemed to me at the time that the market—and maybe even the global economy—had more pain in store. Recency bias got the best of me.

What began as a contrarian move by value-oriented me turned out to be a costly mistake. From the time I bought PPG shares on Feb. 20, 2009, to the end of October 2017, the stock returned 27.6% annualized. Meanwhile,  SPDR S&P 500 ETF gained about 17% annually during that same span. Having sold in March 2009, I missed out on virtually all of that recovery. My opportunity cost was greater still, as my recency bias led me to leave the proceeds of that sale in cash for years afterward.

How can we try to control recency bias? The first step is to recognize that it exists (in 2009, I wasn’t familiar with the concept). But that alone isn’t enough. Inevitably, we will be lured by the siren song of “This time is different.” It’s true that every zig and zag in the market is driven by distinct factors from the zigs and zags that preceded it. So, yes, technically speaking, every time is different. But what’s also true is that the long-term trend in markets has been positive for more than a century. Markets grow as economies grow as corporate earnings grow. This trend has persisted through countless crises. So if there’s any good way to avoid recency bias, I’d suggest that it would be to periodically look at the arc of the markets during the past 100-plus years as a reminder that every time is different, but the markets are still driven by the same fundamentals.

Mistake #3: Paying too much attention

Our most meaningful investment milestones are decades away, but our attention is monopolized by the moment. Paying too much attention to our invest­ments today can put us at risk of missing goals that are years away.

One of the chief side effects of monitoring our invest­ments too closely is that it fuels our aversion to loss. Loss-aversion is but one suitcase among our abundant evolutionary baggage. The theory is that we feel far greater pain from losses than we experience pleasure from gains of equal magnitude. The tie to evolution is that Fred Flintstone had far greater incentive to avoid being mauled by a saber-toothed tiger than to order another oversize rack of ribs from his already-toppled car.

Loss aversion can have a meaningful impact on investor behavior. In “Myopic Loss Aversion and the Equity Premium Puzzle,” Shlomo Benartzi and Richard Thaler demonstrated that the disconnect between the duration of investor’s goals (retiring 30 years from now, for example) and the frequency with which they monitor their portfolios (typically at least once a year) leads to a behavior they coined “myopic loss aversion.” The likelihood of losses in any given one-year period is far greater than the probability of losing money over a longer horizon. But the authors found that annual reviews led investors to behave as if their investment horizon was a year out and not 10 or 20 or 30. This leads many to take less risk (by allocating less to stocks, for example) than is necessary to meet their longer-dated goals.

The best way to shake this behavior is to simply stop paying so much attention to the markets and our portfolios. I am a firm believer in an approach to port­folio monitoring and maintenance that borders on benign neglect. There is so much noise in the markets that the signal typically fades into the background. Tuning out the noise will also help to diminish the illu­sion of control and recency bias. In recent years, I personally have made a habit of only looking at my own investments once every few months or so. I’ve found that every time I turn up the volume knob on the market’s noise-making apparatus, it’s tempted me to tinker with my portfolio. While it’s tough to put the market on mute, I think we’d all be better served by tuning out a bit more often.

Conclusion

We spend a huge amount of time trying to make smart decisions with our money. I think its possible that we could add just as much value—if not more—by avoiding dumb ones.

The most costly errors we make as investors tend to be mental ones. Being aware of our biases is an important first step in preventing these errors. But awareness alone will not suffice.

By focusing on the handful of things that we can control, keeping our eyes trained on our long-term objectives, and tuning out the noise in the market, we can boost our odds of building and sticking to a plan that will help us to meet our goals.

source :morningstar

So where do many investors go so wrong?

So where do many investors go so wrong?

Money. It’s hard to get and easy to lose. It doesn’t take long for the wealth you’ve accumulated to disappear if you don’t manage your money well or have a plan to protect your assets from sudden calamity.

Why Is Asset Allocation So Important?


Essentially, asset allocation is the decision surrounding what percentage of your investments should be in equities vs. fixed income vs. cash. This has everything to do with your specific investing goals, even if you have many at once. 
If you don’t get your asset allocation right—let’s say your portfolio should’ve been 80% equities but it’s really 40% equities—it’s not going to matter how great your underlying investments are if the market is up and you’re missing out on major economic growth. The flip side is also true.
 If your goals and time horizon indicate you should be invested 80% in equities and you are, it may not matter as much if that 80% sits in a mediocre mutual fund, as even a mediocre mutual fund is likely to perform well if its asset class is doing well. 

overcoming emotional biases creates good investments

Warren Buffett said, “The stock market is a highly efficient mechanism for the transfer of wealth from the impatient to the patient”.  Like Buffett,  rely on an evidence-based patient discipline that recognizes the randomness of short-term results. Admittedly understand that the irrational behavior flaws of humans leads us all to make investing mistakes and we seek to do three things as a result:

• Prevent ourselves from succumbing to emotional biases by sticking to a balanced investment discipline.
• Deter ourselves from succumbing to emotional biases by developing a long-term plan.
• Exploit the emotional biases of others using evidence-based strategies like value investing.

Creating Long Term Wealth -Cut out Noise

The market gyrates constantly on headlines, but you should pay them little heed. Trading on day-to-day news events may be a good strategy for professional investors, but not for individuals whose long-term goal is wealth accumulation.

 One reason professionals profit from these events is that people listen to bull or bear voices urging them to act – not based on reason, but on the emotions of fear or greed. These voices are noise that individual investors should filter out.  

This is important to remember in today’s market environment, because investors are overreacting to all the market noise. Rather than following the trend, investors should take a step back and ask what the long-term outlook is for each sector or stock and whether it is being reflected in the underlying valuation. We like to call this a rational approach to investing, which, unfortunately, has become contrary in nature.

 Our advice: Lift that anchor, ignore the noise and take advantage of the opportunities currently presenting themselves in the market

16 nuggets of investing

 1.80% of gains come in 20% of time. So an investor needs enormous patience and conviction to hold stocks or Mutual funds for 10 or 20 years.

 2.Why not all investors get rich? They like to get rich without going through many years of discipline & patience. Process leads to outcome.

 3.An inferior strategy you can stick with is likely to produce better results than a superior strategy you cannot stick with.

4.Prices change frequently. Value change over a period of time. There lies the opportunity.

5.Compounding is back loaded. It works well only over a longer period of time. There is no substitute for time in compounding.

6. 99% of the time, doing nothing is the best thing to do in the market. It is good to be a Rip Van Winkle investor. Activity hurts. Sit still.

7.You cannot predict or control markets. What you can control is how much you save, investment process and behaviour. Focus only on that.

8.Random outcome doesn’t invalidate the need for a process. Sound process and consistently sticking to the same increases the chance of luck.

9. Investors are human. That’s why markets would never be fully efficient.

10. Markets usually run ahead or fall behind. Rarely in equilibrium. Over or under valuation can last for long time. Don’t time the market.

11. Buying and selling is easy. It is holding on through ups and downs is difficult but ultimately most rewarding.

12.Tiny drops of water make the mighty ocean. Invest regularly. Invest for long term. You can create huge wealth.

13.Not investing in equity is more risky than investing in it. Remember, you need to beat the inflation and retain your purchasing power.

14.We see past bear markets as missed opportunities. However thinking of future bear markets is gut wrenching. Strange investor psyche.

15.If someone keeps reviewing value of his house every day, we may suspect his mental health. But that’s what we keep doing with our equities.

16.Equity investments are subject to behaviour risks. Always keep a check on your emotions while investing.

Profit from downside

While Warren Buffett may be alone in his wealth, he is not alone in his wisdom. Great leaders translate moments of uncertainty into moments of opportunity. As John D. Rockefeller advised: “The way to make money is to buy when blood is running in the streets.” Not only do downturns provide the opportunity to streamline operations, they provide the right conditions for innovation to succeed. Creativity loves constraints.

One strategy that separates industry leaders from laggards is that leaders don’t stop innovating when times get tough. In fact, they do quite the opposite, They increase efforts to grab market share, introduce disruptive new products, and expand their reach.

And so, while others proclaim doom and gloom, choose not to participate in their pessimism. Choose to get ahead. Use the downturn to your advantage.Down times are great times for those willing to take risks, get creative, and invest in the future.

Wealth is not created during periods of economic turbulence; rather, wealth simply changes hands. You don’t have to take my word for it, consider the words of one of the wealthiest humans on the planet, Warren Buffett.