What is a no-brainer investment?

“It was a no-brainer: higher risk equals higher return. What junk bond investors had forgotten is that higher risk does not guarantee higher returns; it merely offers the chance of higher returns. When they closed their books on the eighties, they discovered that they had lost the gamble. Ovewr the course of the decade, money invested in the average junk bond grew just 145 percent – substantially less than the 177 percent investors would have earned in US Treasuries, without taking any credit risk whatsoever.”

Whenever someone says an investment is a “no-brainer”, one is indicating that you don’t need any brains to figure out that there is money to be made.

However, in real life, majority of such no-brainer investments turn out to be no-brainers in another way: You do not need any brains to understand the high risk involved.

Be careful. Losing an opportunity is far better than losing your capital.

#RidingTheRollerCoaster

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Beating the markets

There is a tendency among the investors to be able to beat the market averages and their own peers. in this process, many take unnecessary risks or make mistakes. these risks may offer rewards or generate losses. The mistakes take away some part of the earnings that one would have otherwise got from the investment.

The strategy should be to take home as much out of the investment income as possible. It is not about beating the market, it is about participating in the market.

A simple analogy would be to see the average mileage given by a vehicle. If your car runs 15 kmpl, what should be your objective? Should it be to try and get 16 or 17 kmpl? or to get as close to 15 kmpl as possible?

Think of investments in the same manner.

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Easy money

When easy money becomes available, investors tend to take more risks with money that would otherwise lie idle.

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Another “safe haven”?

Look at what happened to another “safe haven” investment …

How safe is your PF money?

Very often, investors think something is safe so long as nothing wrong happens. And then, it is already too late.

I wrote in the book the following line: “We do not perceive risks when things go right and by the time we do, it is too late”

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Hope is a very bad investment strategy

This looks like an interesting development. Another “new” thing has cropped up. Some regional language movies are doing great – low cost and high revenues – amazing success stories and very high RoI (I mean, return on investment). Many investors are looking at the “alternative” investment to “diversify” their portfolios and at the same time earn very high returns.

Even start ups have come up to help people channelise their money into such ventures.

Regional movies are the buzz at crowd-funding startups

This seems to be great for regional movies, at least. There are many talented movie-makers, who could not compete against the mega-star, big-banner movies with deep pockets. Now, they seem to have found their source of funding.

Well, here is the caveat for the investors. This seems to be another case of “too much money, where to invest?” for the investors. Once one has run out of investment options (psychologically, at least), we start searching for newer options.

If you get success in some early investments, please be even more careful. The chances are that you might simply be lucky. However, we love to attribute all the success to our superior abilities – that is a human tendency. This would build your confidence, which eventually turns into overconfidence.

This overconfidence in one’s abilities leads to the search for even more risks. One tends to start looking at something that nobody is looking at – the spirit of adventure in us wants to seize this opportunity. And we leave the shores and dive into the deep seas.

Just as a side note, please check why did you think  of investing in movies? Is it because nobody else was doing it and you wanted to take the early-mover advantage? Or is it just that someone told you this was “exclusive”?

The combination of overconfidence, exclusivity and greed lead us to take interesting decisions.

Let us analyse this option from an investment point of view. Do regional movies make money? Well, yes they do. Do all regional movies make money? No. If we are clear on these two answers, any prudent investor should ask the next question: “How can one identify the next many-making movie? Do I have the capability? Or can I hire someone who has the capability?”

If I cannot identify the next money-spinner or if I do not know someone who can, it is imprudent to put my money on the block. That is not an investment, then. It is hope – a really bad investment strategy.

In the event of an investor recognising one’s inabilities to spot the right investments, the tendency is to look for what is cheap. This could be another trap.

Be careful. Understand the economics of the business before investing your money. If you don’t, stay away. Warren Buffett has famously said, “Invest within your circle of competence. It is not how big the circle is, it is how you define the parameters”.

 

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Chasing yields

When we are in a peculiar situation when the interest rates are below price inflation rate and equity markets have remained at low levels for long, people start to chase yields.

When investments in fixed income securities are not earning to cover price inflation or the growth in expenses, investors have no option but to take on certain risks.

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The real value of history in the world of investing

William Bernstein writes in his classic Four Pillars of Investing – Lessons for building a winning portfolio: “The real value of the historical record is as a gauge of risk, not return.”

Still, majority of discussions focus on which asset class has outperformed or underperformed which other asset class. The focus is too much on the returns generated rather that the risks taken or avoided.

Read history to understand the risks. Read history to understand what can go wrong. Read history to understand what you can do to protect and nurture your investment portfolios.

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