Don't get anchored to events
What does it take to make money in the stock market ? Some would say serious fundamental research while others would vote for price charts. But few also rely on planetary movements to guide them in their stock selection. There is usually one particular event – purchase of stocks during the Mahurat trading session that many investors follow. All types of stock market participants, whether they call themselves investors or traders indulge in this practice, as it is considered auspicious.
The question is whether it is profitable as well? Well, history appears to on the side of the bulls (See table), as in eight out of the past eleven years, the BSE Sensex has increased between 8 and 103 percent from one Mahurat day to another. However, here's an important point to ponder - “Markets may have given returns but have investors earned any returns ?" Let me elaborate :
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Rarely do investors purchase the BSE Sensex on Mahurat day. What is pertinent is whether the stock that you have purchased has risen or not. Often, it so happens that investors will purchase a stock which is considered 'hot' at that point in time. In fact, nowadays, the stocks or sectors which are deemed as favourites by the market 'experts' during the pre-Mahurat programmes on television, are often the ones most sought after (This year it was media-related stocks). Many a time, these stocks have already run up during the past few months. Hence most probably your purchase price will be on the higher side.
While the table displays year-on-year returns, how many of us actually hold on to stocks for long periods ? As one market 'expert' quipped on TV “We want to buy stocks on Diwali and want to sell them by Holi". This kind of attitude, reduces equity investing to a virtual toss of a coin. In other words, the short holding periods, dramatically reduce the probability of making profits on a sustained basis.
This fixation over 'dates' is not limited to Samvat trading alone. Sections of the media go into a tizzy at the end of every calendar year / financial year. The two questions which investors or market participants are usually asked during surveys are :
* How will you alter your asset allocation in the year ahead ?
* Where do you think the stockmarket / gold / real estate is headed next year ?
One fails to understand why someone should alter their asset allocation based on the turn of the calendar. While an annual review is advisable, it could be conducted at any time of the year. The second question is even more perplexing. Why should any market change its course based on the calendar ? Market movements are based on a variety of catalysts. However, they may transpire at any time. 'Experts' who answer this question confidently, are either deluding themselves or their listeners. The most prudent answer would be that they cannot predict such movements either on (say) 31 March or during any other day of the year.
This affinity towards the calendar or to an ‘auspicious’ date is an extension of that desire. It is a 'Heuristic' or mental short-cut. Using dates as an anchor, helps our mind to focus better. There are certain other heuristics that also affect our investing decisions. Some of these are :
* The tendency to think in round numbers. Eg, The desire to accumulate Rs 1 crore for retirement, irrespective of whether our retirement is five years or twenty years away.
* The belief that a lower priced stock offers greater value than a higher priced stock. This misconception extends to mutual fund Net Asset Values (NAVs) as well.
* Purchasing a stock merely because it has hit a new 52-week low.
* Getting impressed with high nominal returns, ignoring the time factor.
* Blind belief in the opinions of 'experts' who position themselves as authorities on the subject.
Our susceptibility to such heuristics is exploited by several institutions. A few examples are:
* Insurance companies sell unit-linked insurance plans (Ulips) as a convenient product which bundles the benefit of insurance and investments. Customers seeking such a ‘convenience’ purchase it despite ample evidence that separation of the two is preferable.
* Companies will reduce the face value of their shares so that they appear optically cheap and attract (lazy) investors who do not bother to dig deeper. This is not as far-fetched as it sounds...
While it is a herculean task to completely insulate oneself such events, being cognisant of them will aid us in avoid being mired in financial quicksand. By the way, the stockmarket ended on a negative note during Samvat trading last week. To avoid a reprise, I think we should warn the FIIs that selling stocks on such an 'auspicious' day could be inimical to their financial well-being...
The writer is head – marketing, PPFAS Asset Management. Views are personal.