TIGF is unique because it is one of the first emerging market funds that raise money from the local investors for the local in- vestors. We don't have too many such schemes. Other than this, all Templeton brand of schemes are managed in the same way.
We search for value. To define value, we do a four-step analysis.
First, we check whether a partic- ular stock is cheap compared with the market. We also check how cheap it is vis-Ã -vis the in- dustry as well as its own histori- cal prices. We also check how cheap is the stock based on its own absolute price. Once we run these tests, we do a fundamental analysis. That TIGF invests only in India is a constraint, but we manage it well. A large chunk of our investments are in compa- nies with a market capitalization in excess of $300 million.
TIGF predominantly invests in large-cap scrips. But wouldn't you find more value in small- and mid-caps scrips?
Yes, small- and mid-cap com- panies offer value too. TGIF's mandate is to veer towards large-sized companies--90-95% portfolio is invested in large-cap scrips. Also, it's tough to differ- entiate it from peers when so many analysts and fund manag- ers track the same set of stocks (large-caps). But we have managed to stay ahead in the large- cap fund race. Our portfolio turnover is probably among the lowest in the industry.
How is value philosophy dif- ferent from a contrarian ap- proach to picking stocks?
There was a philosophy called “Dogs of the Dow“, where you start buying the worst-perform- ing stocks from the bottom on a quant screen and hopefully with mean reversion, you do well at the end of the period. When stock prices are low, contrarian investors may buy such stocks.
The value investing concept is fundamentally different. In- dex funds will argue that there can't be a better indicator of the value of a stock than the present price. A value fund will attempt to differentiate value from this price. But the value can be based on the current differen- tial between the price and the perception of the current value.
We try and base our analysis on our estimate of five-year for- ward fundamentals. Then we look at the price taking at a dis- count to that future value. This is our definition of value.
Index providers classify value and growth differently. Broadly, if a stock has low price-to-earn- ings (P-E) or price-to-book (PB) value compared with the index, it is classified as value or else growth. High current PB value in growth stocks implies that growth expectations from these stocks are higher.
Usually well-managed value funds outperform growth funds when markets fall. In volatile markets, why do value funds pick such stocks?
One set of investment phi- losophy is to bet on companies that are doing well in the belief that since they have been suc- cessful, they would continue to do so. In rising markets, some investors use this philosophy and buy stocks that are per- forming well (some of these are real long-term winners).
When markets fall or growth disappoints, these stocks fall the most as they are owned by a majority of investors.
The second set, or value inves- tors, believe that most business- es tend to go in cycles and there is a period of expansion of busi- ness, heightened capacity ex- pansion, followed by increased competition, drop in margins and an unfavourable environ- ment. A majority of investors may blindly shun beaten down or ignored stocks as they don't expect growth from them and this exacerbates the decline.
Those invested in beaten-down stocks of companies with good medium- to long-term potential tend to do relatively well than those who had invested in growth stocks, when the markets turn as they are under-owned. Why haven't value funds picked up in India? Why ha- ven't we seen other fund hous- es focusing on value strategy?
There are some important things for a value strategy. If a stock price is different from its intrinsic value, there is an up- side in the stock you buy. The only thing that limits this up- side is corporate governance.
For example, if a company has a land asset and the value of the land is far more than the market capitalization of the stock of this company, then there is value. But if somebody surreptitiously takes away this asset in one way or another, the investment case is lost.
The point is unless corporate governance norms are fully in force, value investors are at the mercy of company manage- ments. Because if I know that there is value, I am sure the pro- moter also knows that there is a value. So it becomes a bit of an issue as to how does one enforce corporate governance. Unlike in the West, where shareholders are fragmented and investors can actually influence the way companies run (company sell- outs, mergers and so on), that does not happen in India. Here, the promoters of companies take key decisions. For value invest- ing to truly succeed, corporate governance should be enforced.
We will also see how I made investment in Bharti Airtel although I was not sure about business and how it will pan out in the future.
First lets start with the markets ,which are rallying like there is no ending.With a PE of 23.07 and earnings showing signs of improvement, although for few companies in nifty , this is quit a handsome proposition(sorry for being sarcastic about the circumstances),but the best opportunities comes under all these uncertainties . Two of which I capitalize on include IL&FS buying Maytas Infra and Bharti beaten up due to price war.I cannot recommend about Bharti but I'm certain about Maytas , yes even at current price levels.Although it's at 161 but it has immense potential , sector is battered , and you should never under estimate the potential of IL&FS management in handling Infra projects . Seriously speaking I was never thinking about Maytas Infra but when IL&FS made a buy offer it came into limelite,prices shot up and prices became very high , but instead of repenting the decision I entered into it. At that time I was still learning the ways how Infra business works (More on it in my next post where I'll try to plug the pieces), what are boo and bot projects, special purpose vehicles etc. and what is the profit proposition in these two.
My second big investment was Bharti Airtel which I'm not sure why I made although I kept myself away from any technology stock since last two years(Sorry to Mr.Buffet).
Now let's see about Guru's Investing trend chart.
Well we all are aware of the so many things happening in telecom space. First Bharti lost MTN deal and then Tata Docomo came up with one super cheap scheme and then TRAI trying to make a pay per second a mandatory stuff in every service provider's portfolio. But is there any scope for this price war in already ultra low tariff scenario? If we go with Mr. Mittal then there is no such scope left because according to him the deal should have some economic viability and also it should not be a shocker to the customer. I might not know the nitty-gritties of the telecom sector but I know that telecom has become an essential commodity in our lives and this part cannot be ruled out for decades to come, may be the format of services change but not the need for the service.
If I call this a commoditization of telecom sector then I think I'm not wrong (there may be chances that I'm wrong though). And that's also true that in a commodity type business where profit margins are low then scale play its role. And scale can only be built if SP's can provided better customer support system and also better options for customers.
Our fund had invested on Bharti Airtel in the hey days of October 2008 and it’s constitute 9% of our portfolio. Although it was way beyond Buffet style of investing, but being a technical guy I can understand the difference in the services of different SP's and also the price/value scenario was in our favor at that time. I put that as a bond equity kind of investment where I was suppose to get 25% annual return. My time line if infinite till Airtel is giving me an earning with a coupon of around 5-8% . The whole idea was on the basis that Bharti is still the market leader and it’s like a shark ready to eat others. One good strategy about Airtel is Grow consolidate and then back to the Growth cycle and the spiral continues . Check this out:--
1) Bharti Airtel has 24.3% customer market share and 33.8% revenue market share.
2) Vodafone India has 18.8% customer market share and 20.7% revenue market share.
3) Idea Cellular has 11.2% subscribers market share and 12.1% revenue market share
4) BSNL has subscriber share of 12.7% and mere 10.2% of revenue share
5) Reliance Communications is the worst performer with 18.9% customer market share and pathetic 11.5% revenue market share.
Second, It’s kind of physiological that once you subscribe to a service provider you are least likely to change that until unless service deteriorates which is not with airtel, because my family members and colleagues are satisfied with the hassle free service, although there may be many dissatisfied customers also, satisfaction outnumbers dissatisfaction.
Mr. Sanjay Kapoor President, Mobile Services at Bharti Airtel said,
We will not have a knee jerk reaction. No free minutes models are sustainable. Reliance will eventually withdraw after sometime. Airtel will remain competitive with excellent QoS. Since Reliance GSM launch in the past few weeks, we have not seen any impact nor there is any such caution to be noticed.
And I think he is right , because in the only economic viable model will survive and these short term subscriber oriented schemes will be outdated by better services and support.
Warren Buffet said:-
“If you don’t know jewelry, know the jeweler.”
And I think Mr. Mittal and Mr. Kohli are better jewelers in Telecom space. So I’m not going to sell Airtel that easily!!!!!
Saludos,
Ashutosh
P/E :- 22.90
P/B :- 3.76
Dividen Yield :- 1.00
"You are neither right nor wrong because the crowd disagrees with you. You are right because your data and reasoning are right."
Thanks,
Ashutosh
P/E :- 21.66
P/B :- 3.78
Div Yield :- 1.06
Well this is a real great explanation of Inventory Turn and Profit Marging and I don't want to miss it by any means, that's why I'm adding it in my blog just for educational purpose.
You can visit this article at http://www.fwallstreet.com/blog/189.htm
Understanding the True Profit Margin
By Joe Ponzio on August 7, 2009
On the heels of yesterday's article, I received an e-mail from a friend this afternoon asking me about my thoughts on inventory turns and profit margins. To paraphrase: The math doesn't work right, as the inventory turns don't affect the profit margins each year.
I didn't do a good job of explaining it properly; so, let's look at the "true" profit margin of a company.
The Low Cost Business
We all know that it's better to have a low-cost business than a high-cost business. Companies with relatively small capital expenditures and fat profit margins should be chosen over those with high capital expenditures and thin margins, assuming all other things are equal.
If you can find good companies that generate tons of cash on a relatively small amount of invested capital, and you can buy those companies at a discount to their intrinsic value, you'll probably find that your long-term investment results are quite satisfactory.
Profit Margin on One Inventory Turn
So...we turn to two businesses, each of which has a thin profit margin, to see how inventory turns can give us some insight into the economics of the company. Let's first look at the economics of the business from a single sale perspective to show that they're the same:
(Note: The number of "inventory turns" refers to the number of times a company must replenish its inventory throughout the year. If Walgreens orders one case of Coca-Cola each month, and sells one case each month, it will have "turned" its Coca-Cola inventory twelve times that year.)
| Company A | Company B | |
| Revenue | $ 100 | $ 100 |
| Cost of goods sold | 98 | 98 |
| Other expenses and taxes | — | — |
| Net income / Cash flow | $ 2 | $ 2 |
| Profit margin | 2% | 2% |
In this case, both businesses earned $2 on $100 of revenue. Their profit margins were 2% ($2 divided by $100). Fortunately, they lived in the land of Tina's Family Therapy; so, no taxes or any other costs.
Both companies invested $98 in inventory (cost of goods sold), sold it for $100, and made a $2 profit.Simple enough.
Conventional wisdom would say that both businesses should be avoided. We're supposed to look for businesses with wonderful economics, and a 2% profit margin is anything but "wonderful." Then again, we're all about being non-conventional around here.
Profit Margin on Multiple Inventory Turns
Same companies, but factoring one year of inventory turns into the mix:
| Company A | Company B | |
| Inventory turns | 12 | 2 |
| Revenue | $ 1,200 | $ 200 |
| Cost of goods sold | 1,176 | 196 |
| Other expenses and taxes | — | — |
| Net income / Cash flow | $ 24 | $ 4 |
| Profit margin | 2% | 2% |
Right off the bat, these companies may still look similar. Though Company A has greater sales and revenues than Company B, they both boast 2% profit margins and seemingly terrible economics.
Then again, these are businesses, not just numbers on a piece of paper. And the business of Company A is far superior to that of Company B from an owner's perspective.
What Each Business Invested to Earn Their Income
Let's first look at Company B. To generate $4 in income, it invested $196 in inventory (cost of goods sold), right? Wrong. Because it had two inventory turns, it invested $98 in inventory to generate $100 in sales, took the profit from that, reinvested the $98 in more inventory, and then turned another sale.
Essentially, Company B invested the same $98 twice to earn $4. Already see where this is going?
Company A invested $98 in inventory to earn $2, but was able to reinvest that $98 eleven more times to generate a total of $24.
Both companies invested $98 to earn $2, but Company A was able to reinvest it faster, thus generating six times more than Company B.
The "true" profit margin of Company A was not 2%, but 24%. The "true" profit margin of Company B was not 2%, but 4%. Here's how it works:
True Profit Margins...as Bonds
Think of the true profit margin as a bond with a fixed interest rate. Would you rather have a bond paying 24% or a bond paying 4%? The answer is clear.
Company A and Company B both invested $98 into their business through the purchase of inventory. In essence, each purchased a $98 bond (the inventory), and that bond generates a certain amount of profit ($2). Except that Company A's "bond" pays that $2 monthly while Company B's "bond" pays $2 every six months.
Which company has better economics? They both have terrible profit margins from an accounting standpoint, but then again — accounting numbers are for the IRS. Business owners and investors follow the cash.
Which Company Will Grow Faster?
It's pretty clear in the above example that Company A will have a better chance to grow faster than Company B. It generates more in sales, and it generates more cash. Let's level the playing field. Instead of selling products for $100, Company B is selling higher priced goods. It buys products for $588 and sells them for $600. Both companies have the same revenues, cost of goods, net income, and profit margins:
| Company A | Company B | |
| Inventory turns | 12 | 2 |
| Revenue | $ 1,200 | $ 1,200 |
| Cost of goods sold | 1,176 | 1,176 |
| Other expenses and taxes | — | — |
| Net income / Cash flow | $ 24 | $ 24 |
| Profit margin | 2% | 2% |
So...which is the better investment?
Though it looks like we've leveled the playing field, we really haven't. These are two very different businesses. To understand this, we have to work backwards.
How will Company A and Company B generate additional cash? With no other expenses, they each have three choices:
- raise the price of their products (e.g., from $100 to $105, from $600 to $630),
- lower their cost of inventory (e.g., find cheaper inventory at, say, $90 and $500), or
- sell more of their products.
If they can't raise prices and they can't find any cheaper suppliers, their only option is to sell more of their product. While that is great in theory, it ain't so simple in the real world. Unless they have some magic formula for making cash appear out of thin air, how will they purchase additional inventory so that they can sell more of their finished product?
Assuming neither has cash in the bank or access to outside financing, they have one of two choices:
- require payment upfront, and then use the customer's money to purchase inventory, or
- save up enough cash to purchase more inventory, using the funds of the business.
Some businesses can do the former; but, let's assume that these two companies are retailers, and that their customers aren't paying for clothes today, but willing to take delivery in sixty days. To get more inventory which will lead to more sales, the company's must use the funds of the business.
But wait — neither company has cash in the bank! Okay — how long will it take before the companies can expand? That is...which company will grow faster?
| Company A | Company B | |
| Profits | $ 24 | $ 24 |
| Cost to purchase more inventory | $ 98 | $588 |
| Years until company can handle double sales volume | 4.1 | 24.5 |
In 4.1 years, Company A will have saved $98 from its $24 of profits — enough to purchase another unit of inventory. With two units of inventory both being sold concurrently, the company is generating twice as much cash.
It will take Company B 24.5 years to save up $588, if saving just $24 per year. As such, Company B will have to wait 24.5 years before it can double its cash flow.
Again — which company has the better economics: the one that can double every four years or the one that doubles every 25?
The Race is Over Before it Begins
If we fast forward and look at these two companies in 25 years, assuming that each tried to beef up their inventory at the end of the year (not 0.1 years into year 4), Company B has finally purchased another unit of inventory and will begin generating $48 a year in excess cash. Company A, on the other hand, has 465 units of inventory and is generating $11,160 in excess cash.
And while Company B has finally beefed up sales to $2,400 ($600 times 2 inventory turns times 2 units of inventory), Company A is generating $558,000 in sales — 233 times the amount of sales!
High Profit Margin/Low Turnover
Finally, consider this: A high profit margin business may have a very low "true" profit margin, and may be a candidate to avoid. When comparing a 2% profit margin business to a 10% profit margin business, many investors automatically assume that the 10% business is better.
That's not necessarily true.
Everything else being equal, the 10% margin business with one inventory turn is no better or worse than the 2% margin business with five turns a year.
4 minutes later:
the violinist received his first dollar: a woman threw the money in the hat and, without stopping, continued to walk...
6 minutes:
A young man leaned against the wall to listen to him, then looked at his watch and started to walk again.
10 minutes:
A 3-year old boy stopped but his mother tugged him along hurriedly. The kid stopped to look at the violinist again, but the mother pushed hard and the child continued to walk, turning his head all the time. This action was repeated by several other children. Every parent, without exception, forced their children to move on quickly.
45 minutes:
The musician played continuously. Only 6 people stopped and listened for a short while. About 20 gave money but continued to walk at their normal pace. The man collected a total of $32.
1 hour:
He finished playing and silence took over. No one noticed. No one applauded, nor was there any recognition.
No one knew this, but the violinist was Joshua Bell, one of the greatest musicians in the world. He played one of the most intricate pieces ever written, with a violin worth $3.5 million dollars. Two days before Joshua Bell sold out a theater in Boston where the seats averaged $100.
This is a true story. Joshua Bell playing incognito in the metro station was organized by the Washington Post as part of a social experiment about perception, taste and people's priorities. The questions raised: in a common place environment at an inappropriate hour, do we perceive beauty? Do we stop to appreciate it? Do we recognize talent in an unexpected context?
One possible conclusion reached from this experiment could be this: If we do not have a moment to stop and listen to one of the best musicians in the world, playing some of the finest music ever written, with one of the most beautiful instruments ever made.... How many other things are we missing?
So after a long time, I’m here to write again. So what should I write about? After reading about so many market predictions and how to? recommendations I found myself confounded. Some say buy this sell that , other say “Still no signs of green shoots”. Me as a really small retail investor is apprehensive about every step because my mind is anchored to those hey days of market downfall. Those were the days where you can really throw a dart and come out winning. But things have changed right now and investor need to be cautious and alert as to when to strike the next opportunity.
Well the major issue today almost everyone is facing is an anchoring effect where you get anchored to the 52 weeks high lows and forgot about the real value of the underlining assets (tangible and intangible). Well this is one mistake that I made where I anchored and due to which I was caught by Decision Paralysis, and I lost so many great opportunities. I kept waiting for lows and bottoms but never made a decision. And those actions or inactions cost me making big scores.And I’m going to keep this in mind for future. I’ll keep working on my mental models till they reach from my mouth to my mind. For all the small investors like me , show is not over and you can still fight hard to search for those birds in the bush which are ready to fly and can give good returns according to your bench mark. My Bench Mark is 24% CAGR, which I failed to achieve since I started my fund although I have beaten the market in both the years[Oh no!!! again Anchoring but I have to].
Book Reco:----
I recently completed Mary Buffet’s “Buffet logy” and I’m quite impressed with her simplicity. She has explained the crux of Buffet Investing in a real simple manner to us. I would recommend that Book to You.
Read This article From Sanjay Bakshi’s blog
http://www.sanjaybakshi.net/Sanjay_Bakshi/Blog/Entries/2009/8/2_The_Chart_that_worries_me.html
With the approach of investing in simple businesses,which I can understand I started investing in Page Industries (yes the makers of Jockey brand in india) not a very well known name then what is your idea worth if it's known to everyone.Although stock was not doing great and was keeping low in volumes, the spark came when outlook profit gave an analysis about the company and it's stock soared. Page Industries constitute around 9% of my portfolio although the plan was to make it up to 15-20% , but sudden rise in prices took it out of my buying range.I'm not sure if I'm going to regret later , but I can't risk my and my family's money at this price.With great brand and changing mindset of the Indian Consumer ,while choosing under garment ,this is a sure shot winner.It has high ROE and ROTC and is maintaining good profit margins with good earning growth of around 33% CA.
Visit www.jockeyindia.com and find yourself some boxers or undergarments.
Thanks
Joe Koster's summary of Charlie Munger's Investing Principles Checklist, according to Poor Charlie's Almanack. Charlie’s most basic guiding principles, his fundamental philosophy of life: Preparation. Discipline. Patience. Decisiveness.
Risk - All investment evaluations should begin by measuring risk, especially reputational
- Incorporate an appropriate margin of safety
- Avoid dealing with people of questionable character
- Insist upon proper compensation for risk assumed
- Always beware of inflation and interest rate exposures
- Avoid big mistakes; shun permanent capital loss
Independence - "Only in fairy tales are emperors told they are naked"
- Objectivity and rationality require independence of thought
- Remember that just because other people agree or disagree with you doesn’t make you right or wrong - the only thing that matters is the correctness of your analysis and judgment
- Mimicking the herd invites regression to the mean (merely average performance)
Preparation - "The only way to win is to work, work, work, work, and hope to have a few insights"
- Develop into a lifelong self-learner through voracious reading; cultivate curiosity and strive to become a little wiser every day
- More important than the will to win is the will to prepare
- Develop fluency in mental models from the major academic disciplines
- If you want to get smart, the question you have to keep asking is "why, why, why?"
Intellectual humility - Acknowledging what you don’t know is the dawning of wisdom
- Stay within a well-defined circle of competence
- Identify and reconcile disconfirming evidence
- Resist the craving for false precision, false certainties, etc.
- Above all, never fool yourself, and remember that you are the easiest person to fool
"Understanding both the power of compound interest and the difficulty of getting it is the heart and soul of understanding a lot of things."
Analytic rigor - Use of the scientific method and effective checklists minimizes errors and omissions
- Determine value apart from price; progress apart from activity; wealth apart from size
- It is better to remember the obvious than to grasp the esoteric
- Be a business analyst, not a market, macroeconomic, or security analyst
- Consider totality of risk and effect; look always at potential second order and higher level impacts
- Think forwards and backwards - Invert, always invert
Allocation - Proper allocation of capital is an investor’s number one job
- Remember that highest and best use is always measured by the next best use (opportunity cost)
- Good ideas are rare - when the odds are greatly in your favor, bet (allocate) heavily
- Don’t "fall in love" with an investment - be situation-dependent and opportunity-driven
Patience - Resist the natural human bias to act
- "Compound interest is the eighth wonder of the world" (Einstein); never interrupt it unnecessarily
- Avoid unnecessary transactional taxes and frictional costs; never take action for its own sake
- Be alert for the arrival of luck
- Enjoy the process along with the proceeds, because the process is where you live
Decisiveness - When proper circumstances present themselves, act with decisiveness and conviction
- Be fearful when others are greedy, and greedy when others are fearful
- Opportunity doesn’t come often, so seize it when it comes
- Opportunity meeting the prepared mind; that’s the game
Change - Live with change and accept unremovable complexity
- Recognize and adapt to the true nature of the world around you; don’t expect it to adapt to you
- Continually challenge and willingly amend your "best-loved ideas"
- Recognize reality even when you don’t like it - especially when you don’t like it
Focus - Keep things simple and remember what you set out to do
- Remember that reputation and integrity are your most valuable assets - and can be lost in a heartbeat
- Guard against the effects of hubris (arrogance) and boredom
- Don’t overlook the obvious by drowning in minutiae (the small details)
- Be careful to exclude unneeded information or slop: "A small leak can sink a great ship"
- Face your big troubles; don’t sweep them under the rug
In the end, it comes down to Charlie’s most basic guiding principles, his fundamental philosophy of life:Preparation. Discipline. Patience. Decisiveness.
Groups
The scrips traded on BSE have been classified into various groups.
BSE has, for the guidance and benefit of the investors, classified the scrips in the Equity Segment into 'A', ‘B’,'T', ‘S', ‘TS' and 'Z' groups on certain qualitative and quantitative parameters.
The "F" Group represents the Fixed Income Securities.
The "T" Group represents scrips which are settled on a trade-to-trade basis as a surveillance measure.
The "S" Group represents scrips forming part of the "BSE-Indonext" segment.
The "TS" Group consists of scrips in the "BSE-Indonext" segment, which are settled on a trade-to- trade basis as a surveillance measure.
Trading in Government Securities by the retail investors is done under the "G" group.
The 'Z' group was introduced by BSE in July 1999 and includes companies which have failed to comply with its listing requirements and/or have failed to resolve investor complaints and/or have not made the required arrangements with both the depositories, viz., Central Depository Services (I) Ltd. (CDSL) and National Securities Depository Ltd. (NSDL) for dematerialization of their securities.
BSE also provides a facility to the market participants for on-line trading of odd-lot securities in physical form in 'A', 'B', 'T', 'S', 'TS' and 'Z' groups and in rights renunciations in all groups of scrips in the Equity Segment.
With effect from December 31, 2001, trading in all securities listed in the Equity segment takes place in one market segment, viz., Compulsory Rolling Settlement Segment (CRS).
The scrips of companies which are in demat can be traded in market lot of 1. However, the securities of companies which are still in the physical form are traded in the market lot of generally either 50 or 100. Investors having quantities of securities less than the market lot are required to sell them as "Odd Lots". This facility offers an exit route to investors to dispose of their odd lots of securities, and also provides them an opportunity to consolidate their securities into market lots.
This facility of selling physical shares in compulsory demat scrips is called an Exit Route Scheme. This facility can also be used by small investors for selling up to 500 shares in physical form in respect of scrips of companies where trades are required to be compulsorily settled by all investors in demat mode.
I came across this very unpopular book "Why smart people make big money mistakes and how to correct them" by Gary Belsky and Thomas Gilovich, so I thought that I should try to concise the book so please bear with me...
Here are the principles:---
1)Mental Accounting - is a term used to describe the way people tend to treat money differently depending on where it comes from,where it's kept or how it's spent. It can be useful habit when it leads you to treat savings for college or retirement as scared. But it can be dangerous when it cause you to spend money from some sources- such as gift,bonuses or tax refunds - more quickly than your might otherwise.Think about it and you will realize that you are caught with this bias.
2)Loss Aversion - One of the central tenet of prospect theory - a bedrock principle of behavioral finance - is that people are loss averse . The pain people feel from loosing Rs1000 is much greater than the pleasure they experience from gaining the same amount. this helps to explain why people behave inconsistently when taking risk.. For example the same person can act conservatively when protecting gains ( by selling successful investments to guarantee the profits.) but recklessly when seeking to avoid losses(By holding on to losing investments in the hope that they will become profitable).
3)The sunk cost fallacy - one of the most common behavioral finance mistakes, results in financial decisions that are based on previous investments or expenditures. Such a tendency is harmful for the simple reason that past mistake shouldn't lead you to make future ones.The past is past and what matters is what is likely to happen from now on .Well this is one of the tendency why so many government projects fail in the first place or took too much time for completion.Because once started they can never be closed because so much money has already been spent.
4)Number Numbness: This is the one which haunt most of the people and is again very dangerous . I have been a victim of it before I read something about it in Prof. Bakshi's blog. People give too much importance to big numbers an too little importance to smaller one. This is one of the reason value stores are still lagging behind kirana stores, though the saving potential in value store is more than general corner kirana store.People never thought that these small costs are the main criminals in there financial planning.Bigness bias is another term for this.This can also lead you to pay more than you need to, for the brokerage commission and mutual fund expenses.One common example is, many between us think that investing in a small mutual fund will lead you to greater returns but this is not at all true. Below is an example of sundram Tax saver recently noted No.1 tax saver fund and SBI Magnum Tax gain , both growth. Now both these funds have beaten the sensex since long(SBI Magnum has beaten it since 1996) but SBI magnum has also beaten sundaram since the start of sundaram I don't know why but high expense ratio is a surety.
5) Anchoring: The tendency to weigh certain facts , figures , and events too heavily and make your decision based on those. Example , you came to know that your friend has bought an antic for rs10000 then you will linger to that figure to buy one for you although it's not worth it. You can replace antic with anything : a fine buffet, buying a house, or anything.You just linger to the figure your friend has quoted and would always like to strike a better deal . After all you want to realize everyone your rationality.
6) Decision Paralysis : - Simple! most people never came to decision and keep on fighting with themselves to prove the points wrong. They seek lot of information , do thorough research and but are still skeptical about making a decision to buy any investment, buying a house etc.
Well these are some of the thoughts, Behavioral finance is a vast subject , once you overcame some of the biases, you will realize that you will get an edge towards so many psychological forces which are trying to beat you.
There is one more great book on Psychology :-- "Psychology Of Persuasion" By Robert Cladini,a great reads to.
Thanks,
Ashutosh
"Reading great books is a better concentration technique than doing Yoga :-)"
