Happy Dussehra

Raavan was a very learned man and a great warrior. Though he abducted Sita, he never once touched her and paid due respect to her. In spite of all these qualities – wisdom, bravery and a strong character, how come he lost to a small army led by Lord Ram?

Maharishi Valmiki indicates in the Ramayana that it was his ego that caused Raavan’s downfall.

In the world of investing, there are many experts – highly qualified, skilled and experienced – and yet unable to see certain obvious risks. The ego and overconfidence blind these wise men. This is an important lesson from the book “Riding The Roller Coaster – Lessons from financial markets we repeatedly forget”.

While this applies to the experts, even the laymen get swayed by overconfidence. Under the spell of ego, we start believing in our invincibility. And then as the popular phrase goes: “Pride cometh before the fall”, meaning pride often causes the fall from grace.

Learn from the story of Raavan. Check your ego. Stay grounded.

Dussehra is also known as Vijayadashami (a day of victory). May you win all the battles and wars against your own emotional Raavans this Vijayadashami.

May this Dussehra bring lots of prosperity in your life.

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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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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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The risk of not diversifying

Few days ago, we explained the need for diversification: read the post here.

Now add to that three important points:

  1. The fall in the value of a concentrated portfolio as compared to a diversified one, and
  2. The investor behaviour of chasing the recent past performance
  3. At any point in time, at least one part of a diversified portfolio would outperform the diversified portfolio itself

These three statements mean a huge risk for most investors. Let us elaborate. First of all, at any point of time, the diversified portfolio would underperform at least one part of its own. In a bull market, especially, one sector would be leading the rally. This sector hogs the limelight. Since the performance is great, many investors invest in it only after seeing great past performance, which means most of the gains have been made and the prices have reached high levels. Buying costly is always a riskier proposition for investors as money-making opportunities are less of one buys costly. The faster rise is often followed by a steep fall. The leader in the rally is generally the leader in the fall, too.

since the investor missed out on the rally and entered at higher levels, there is disappointment for her.

Read more about some more examples in the book “Riding The Roller Coaster – Lessons from financial market cycles we repeatedly forget:

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