Why investors should ignore stock market noise
Posted by: Uma Shashikant on Apr 03, 2017, 06.30 AM IST
By Uma Shashikant
Investors worry about making money decisions when the noise around them makes them wary. A few successful IPOs, a string of higher closes on the market index and a few unexpected mergers or takeovers are enough to get the equity markets buzzing. Soon enough some investors are left wondering if they would be left behind in the next big bull market if they are too cautious.
Some others worry that they might choose wrongly and regret their decisions. What could the investor do about the relentless market buzz relayed to their unprepared minds?
First, those who offer tips and tricks about making a quick buck in the equity markets are not financial advisers. They do not have the investor's interest in mind. Anyone who does not work with the specifics of the financial situation of the investor is not an adviser. These operators are merely broadcasters of information. They serve a useful economic purpose.
They enable dissemination of news and updates about stocks they track, and they contribute to the low-cost analysis of prospects of a stock, an activity indulged in various levels of intensity by many people. It is important to see that the one-sided recommendations about which stock to buy, whether broadcast on television, printed in media, discussed online, or disseminated as text messages, are all noisy transmission of opinion. They do not constitute advice, and making investment decisions on the basis such information is risky.
Second, public discourses about stocks may omit critical information, or misrepresent the prospects of a business. Not everyone reads and analyses the offer documents filed by a company that comes with an IPO. The advertisements by the company are designed to create mindshare and familiarity for the business, so that the investing public is interested in the offer.
When public discussion about the merits of an IPO or stock happens, there is the inevitable bias from recent events. After a highly successful IPO, investors who failed to get an allotment in the earlier offer, are quite eager to participate in the next one, already biased into believing that it would be worthwhile.
When a few IPOs list at a premium, there is the urgency to not let go an opportunity. This provides the scope for selective utilisation of information that fits within a prejudiced narrative. Investors should seek balanced views that highlight pros and cons, and stay wary of stark one-sided optimism.
Third, any revival in investor interest is always accompanied by an increased onslaught of sellers, keen to encash on the optimism among investors to make an investment decision. Investors should view the presence of sellers of various financial products as part of the market design in which producers create products and structures that appeal to the current fad, and set targets and incentivize sellers and distributors to reach a larger group and mobilise more funds.
Investors should know that cold callers, product pushers and persuasive sellers are usually playing their own numbers game. Unless a seller is able to establish how the product on hand will meet the financial goals and objectives of the investor, there might not be a buying decision to make.
Fourth, the investing decision is primarily about how the savings of the investors should be put to work for securing their future. In that context, the best time to invest is when there is a surplus to deploy and the best time to redeem is when the investor needs the money.
However, it is easy to tempt the investors into believing that they would make more money by getting the timing of their investment decisions right. It is easy to show the past performance of a stock, index, or fund to spin a story about how much could have been made if only the investor had come in at the right time.
Similarly, it is easy to play on the emotional need of the investor to keep the profits and advocate profit booking as an essential investment tactic. Investing conversations that focus merely on the right time to enter and exit are unethical spins based on hindsight. There is no strategy to get it right each time.
Fifth, recommendations about what should be bought is a very common tactic to include an actionable element in a discussion. In my early days of teaching equity investing in the 1980s, given the frenzied bull markets of those times, the participants in my class would tell me that I should make the discussion “practical” by offering some stock picks to buy.
Not much has changed even now, as several bull and bear markets later, investors still seek the comfort of the buying list prepared by someone else. The problem is that none of the recommendations will come with a sell by date, nor will the proponents of the list follow up and let you know when their picks have gone bad. Lists will be reviewed and names will be replaced routinely, but investors who hold what was previously recommended would be largely clueless.
Sixth, eager investors foster fraudsters who will seek login access to their stock trading accounts, open new accounts with great speed, seek blanket approvals for quick action, or set up trades that investors seldom understand or track. Whatever be the lure of profits, it is unwise to give up control or fall prey to unscrupulous elements.
Always ensure that you sign only completely filled up forms that you have verified for your address, email and phone numbers. Track activity in your accounts, and set up sms alerts to stay updated.
The buzz about which stocks to invest in and when, is the chaotic marketplace thinking aloud about the possibilities. At the end of it all, good stocks will prevail and the bad ones will fall off. But that outcome emerges only after many have chosen to buy or sell, and acted on the information that the market is churning.
Traders who track stock prices ride that roller coaster, some taking the high and low with practiced ease and others falling off bruised. The buzz of moving prices, new information, latest rumours, and active counters is for them.
For investors who seek long-term wealth, the winning strategy is always about choosing after carefully considering the merits of the stock or fund and its suitability to their own requirements. That staid and boring activity needs no market timing. Just discipline and patience will do.
(The author is Chairperson, Centre for Investment and Learning.)
This article appeared in Economic Times dated Apr 03, 2017, 06.30 AM IST