Investment guru Warren Buffet has said that “Timing the market is impossible, but time in the market is crucial”. Truer words have never been spoken. Actually, making money in the stock market is as easy as it is difficult.
Easy because all you have to do is to invest in plain vanilla diversified equity schemes, sit tight and leave the fund manager to do his job. But this is difficult to implement because the very same mutual funds, insurance companies, distributors, agents and other types of intermediaries — in short the entire food chain — is busy trying its level best to seduce the small investor away from this simple objective. Therefore, today we are not going to discuss the investments that you should make. Instead let’s see what you should not do in order to optimize your wealth.
‘Our favourite holding period is forever’ If you want to make money in the market, please take these words of Warren Buffet very very seriously
IPOs / NFOs (New Fund Offers) from MFs and insurance companies are best ignored
This is perhaps the one investment principle that the small investor finds the most difficult to implement. If the current upswing in the market continues, soon we investors would be flooded with IPOs from companies and NFOs from mutual funds. Buying an IPO with the intention of making a quick buck upon listing is perhaps the easiest way to lose money. Instead it is better to wait for the price discovery mechanism to take its course. Price discovery happens when the share gets listed in the secondary market. To put it differently, the market knows best. If the stock was worth investing in, yes, it will list at a premium. However, stocks are long-term investments, therefore, its not too late to get in even then. However, with this approach, you eschew the risk of choosing duds. A similar principle is applicable to MFs and insurance companies. New offers are launched essentially with the idea of taking advantage of the feel good factor that seeps into investors due to the market buoyancy. In the meanwhile, existing well performing schemes that have a track record of earning over 100% returns over the last five years are conveniently ignored. In the end, this seduction game ends leaving the mutual fund happy — it has increased its AUM (Assets Under Management). The distributor / agent is happy, he has made his fees. And we guess the hapless small investor is happy too — but for all the wrong reasons.
The myth of tax planning
After MFs, let’s turn our attention to insurance companies and the tax planning spiel that will start being spouted, now that we are coming close to March 31st. Here’s the inside scoop — there is no such thing as tax planning — over time, the government has systematically and steadily discontinued most tax deductions and the only tax saving (as against planning) devices left are an extremely congested Sec. 80C. So let us do your “tax planning” for you in the next few lines. First of all, lets understand that the maximum amount of income (apart from the basic exemption) that you can save tax on through Sec. 80C is Rs. 1 lakh. Now, first take into account mandatory payments like provident fund, housing loan EMIs and tuition fees if applicable. Reduce these from the one lakh limit. Distribute the balance between PPF and a tax saving mutual fund (ELSS) depending upon your age and risk profile. Done and dusted! This is your “tax planning” exercise for FY 12-13.
Remember, any income over Rs. 2 lakh is fully taxable. Add to this Rs. 1 lakh of Sec. 80C. So basically, it’s impossible to save tax on an income over Rs. 3 lakh per annum. Of course there are some other small deductions like that of mediclaim etc. But largely, this is the ball park figure beyond which one comes into the tax net, no matter what. Putting it differently, beyond a point, tax saving or tax planning or whatever other term that they think of next is not possible. Instead focus all your energies on optimizing post tax income. And to do that, avoid the most common pitfall that is discussed next.
Timing the market
“Our favourite holding period is forever” If you want to make money in the stock market, please take these words of Warren Buffet very very seriously. Most people that we have spoken to assert vigorously that they are long-term investors. However, this so called long-term mind set prevails only as long as the market is rising. At the first sign of a fall, panic sets in. As we write this, the Sensex is at 19,453 points. The current situation is a good lesson to all investors. After being range bound for over three years, the Sensex has suddenly pressed on the accelerator. But by now, having lost patience, many investors have pulled out their money. Now these very same investors will flock back. Chasing returns has never worked and will never work.
The key lesson is never to panic. If you enter the stock market, you should have the heart to witness valuations falling. What’s happening currently is perfectly natural and is what is known as a market cycle. Though we have no clue whether the market will continue its rise, we have learnt that after a fall comes the rise and vice versa. This is the nature of the market and there is no way you or anyone else can change it. So, as an investor, the next best thing you could do is to ignore the ambient noise and stick to a goal based financial plan. In other words, your fortune as an investor would depend upon how you react or more appropriately — don’t react to the situation.
To reiterate – “Timing the market is impossible, but time in the market is crucial”. This gem from Buffet is oft quoted but the fact is that it is seldom practiced. Start practicing it and believe us, it will be you who will be laughing all the way to the bank. The long and short of it? Successful investing is entirely up to you. Question is — are you up to it?
A N Shanbhag
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