Saturday, October 08, 2011

The Prediction Game

Its an interesting thought that you actually work only for 8 months in a year. The balance 4 months you work for the government, so it lets you earn for the first 8 months. I am talking about the taxes of 33% on your total income. That's how it literally translates. I am perfectly fine paying money as taxes but we need to have a different perspective when we look at it. Imagine the physical and mental stress we undergo for 4 months in a year and that's when you realize what a mighty fine the government imposes. It suddenly will make you remember the severity of life. 4 months of work time, 4 months of mental and agonizing moments you had to put up with at work. It could also mean missed 4 months of enjoyable time with parents and your loved ones, 4 months of holidaying etc. etc. Money by itself has little value. When you associate it with time value, it starts making sense. There are many things we could have missed out on, or looked forward to in the 'time' that lapsed. Money is not real. Money is what we make of it. I would like to unravel a mystery that I discovered recently. I was playing Monopoly, a board game with my son. If you have not played it yet, it is sought of a game where you can use game money to buy , sell, barter etc. like in real world. You start by have an imaginary amount of money and then you are complelled to take decisions (to buy, rent etc.) as the dice roll. I was eager to buy houses and estate so as to earn rent and multiply money. My son was busy buying parks and parking lots. I was trying to guide him on value of investing in real estate and security of rental income and how this could add on to his wealth. I was intrigued when the 8 year old told me he likes to buy parks so we could go out and spend time together. He bought parking lot so I could park easily in the busy street. He had no complex thoughts and valued the time we could spend together and how he could make my driving a better experience. This gave me a different perspective to life and investing. More money does not mean more happiness. Money is like a shoe, if it is bigger than your fit, you can stumble. If it is too tight, it hurts you. The right fit is a conscious decision and varies from every individual.

The investing brain fools us into thinking we have far more mastery about the future and are aware of it. It makes us believe we have a intuitive power to know something special about a stock. Thats why every analyst on business Channel necessarily has an opinion on which side markets will sway, what industries and sectors will do well next year. Why can't we say we don't have an opinion? Is it difficult to understand that we can't be right more than 50% of the times? When SKS Microfinance came up with an IPO it had 36 anchor investors at the upper-end of the price band at Rs 985 per share. It was inclusive of legendary investors like George Soros and Infosys founder NR Narayana Murthy. During the IPO, an analyst report quoted like this " SKS's core strength lies in effective risk management, governance, advanced technology, wide product portfolio, diversified sources of capital, strong pan-India distribution network, and lowest cost of credit to the poorest to, unlocking tremendous latent demand". There was none who could recognize the risk of government (ir-) regulations.

The company's shares were listed at 1040 and currently trades at 212 and Investors lost three-fourth of their investments in one year. since listing, the Andhra Pradesh government introduced a law to ban unfair debt collection practices, which impacted its loan recoveries and resulted in the company posting losses. Now this was totally unexpected. It is perfectly normal for every fund manager and investor to have not foreseen. Investing is an art for the moderate who is neither an optimist nor a pessimist. Investing should look boring and dull and that's when it delivers.

The story of SKS plays out every day in our lives, in different hues. That’s the way our brains have been wired. The only way one can win the prediction game is by refusing to play it.

Happy Investing,


1 comment:

Rahul Paliwal said...

"Investing should look boring and dull and that's when it delivers."...Words of wisdom, Dear Naresh..Nice article! Loved it.