Testimonial on www.amazon.in

 

 

“Amit takes us down the memory lane and re-caps the previous rallies and the turmoils. It is very interesting when he says that markets do fall because they do rise. The book is punched with interesting observations from similar books and mixes a good bunch of humour in between. This is a good read to set our expectations as an investor. Very good guide when we need help to learn the right behaviour in the market, as an investor. I enjoyed reading & learning.”

Rohit Shah on http://www.amazon.in

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Why understanding investor psychology is important – 2

Continuing from yesterday’s post:

While the various assets would generate various kinds of investment returns, be it current income (in form of rent, interest or dividends) or capital growth over the years, it entirely depends on the behaviour of the investor as to how much of it one takes home.

This gap between what an investment generates and what an investor gets depends on costs (transaction costs, holding costs, maintenance costs, etc.), taxes and investor psychology. To some extent, the former increase due to unstable mind of the investor.

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A short intro …

The book “Riding The Roller Coaster – Lessons from financial market cycles we repeatedly forget” is a story of various events that took place in the history of financial markets. More than that, it’s a story of the fickleness of the human mind.

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“Too good to be true”

Here is an excerpt from an interview of one of the finest bankers in India, Mr. Uday Kotak:

There is an internal story. There was this particular trade that had come to us, which was extremely profitable. It was too good to be true. That is a line we follow…if something is too good to be true, don’t do it. It worked for us. Another brokerage firm took that job And they were banned by Sebi for five years. We just said thank God!

Look at what he says. “If something is too good to be true, we don’t do it”.

I wish many small investors followed such a philosophy.

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Gujarati edition

Coming soon … Gujarati edition of “Riding The Roller Coaster – Lessons from financial market cycles we repeatedly forget”

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Financial engineering?

Engineers are believed to be doing very well in financial services, especially in the areas of complex derivatives using Mathematical models.

Logically, the purpose of engineering should be either to increase returns for the investors or reduce the risk on investments. In many cases, exactly opposite happens. Either the investment returns go down or the risk goes up or both. Here is another such case that promised to offer both the promise of capital safety and higher returns. Read the article to know the final outcome. Those interested in further analysis, may also like this blog post by Joshua Brown, the reformed broker.

When there is excess money in hand and when the yields are low, very often investors chase yields – something that seems to be offering (promising) higher yields than available in the market is lapped up even by ignoring the risks involved.

Investors beware. Caveat emptor. Don’t invest in something you don’t understand.

When ignorance and excess liquidity meet, the results often are interesting case studies for future generations.

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What should you believe?

Have a look at these two posts:

  1. A post I wrote some time back: Experts cannot predict, and
  2. An interview of Udayan Mukherjee

I would leave it for you to conclude, whichever way you want.

The profession of forecasting has a great future.

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