Stock mkt investing is not just about number crunching

Stock market investing is not just about number crunching and balance sheet analysis. It involves a bit of mind game too. In an interview with Business Line, Mr Parag Parikh, Chairman, Parag Parikh Financial Advisory Services, shares interesting insights on behavioural finance and how investors can use it to make investment decisions. Excerpts:

How does behavioural finance explain the market and its movements?

We all learn that stock markets are efficient and people make rational decisions to maximise their profits. Now, behavioural finance is exactly the opposite. It says that markets are not efficient, especially in the short run. Suppose you find Rs 5 coin on the road when you are walking. Now, why do you think no one saw it, despite so many walking on the road? In the same way, markets are not efficient. Now take the case of people making rational decisions. If this were true, how would you explain people giving money to charities, or spending on parties to celebrate birthdays?

These are not rational acts because money is going out, but people still do it out of their hearts. More often than not, we make decisions from our hearts and not mind. That humans make irrational decisions at every point of time is also the reason why markets are so interesting and have a full industry following it.

How do you integrate behavioural finance into the services you offer?

My idea is to educate investors, to make them know that there are no short-cuts in the markets. The way markets are going up, banks are lending margin money and some of the mutual fund houses are advising investors, it all gives the wrong impression that one can make money in the market by simply buying and selling stocks. These are wrong notions. We cannot sow a seed today and expect it to become a tree tomorrow. It has to go through various stages and seasons to become one.

What we do is adopt a slow and steady approach. Our clients believe in our philosophy of value investing; we don't take money from people just because they are ready to give it us.

So why are you then entering the mutual fund business now?

The minimum entry amount for our PMS business is Rs 5 lakh. By entering the mutual funds space, we can cater to the small investor. He is the person who needs it the most. MF is a very good vehicle to meet their needs.

Here again, we will be different and will not concentrate on amassing AUM. We will concentrate on performance alone, using value-investing and behavioural finance. This is what we did in 2008. When the markets crashed, we went to our clients and told them to give us money!

You have to buy when others are selling and sell when others are buying. This is the basic concept of buying a value.

But unfortunately in the stock markets, investors find a stock less risky if everybody is buying and the stock prices are going up. And they find it more risky, when nobody is buying and the stock prices are down. That's the challenge we have to work with.

How do you use behavioural finance to invest?

We don't have a brilliant team, no one with capabilities to point out exactly how the markets will move! What we instead do is identify a good business, with a credible management and with a good moat around its business, strong network and less debt. We only buy such businesses and at the time they are available at a discount in the market. And when is that? When there is excessive fear in the market. We buy at that time and stay away from the market after that.

With so many companies tapping the primary markets, what is your view on IPOs as an investment vehicle?

I don't believe in investing in initial public offerings. Tell me why are there no IPOs in bad markets? Why do they come only in good markets?

That's because in good markets people are willing to pay any price for anything. The management agrees to sell their shares during good times because they know they will get a much better value for their shares.

And why don't companies come out with IPOs during bear markets? Well, because promoters feel that their share price should be valued higher than the rest of the market.

Why do you think retail interest took so much time to pick up?

Interest is how you see it. With the market picking up, we will certainly see retail activity picking up, as greed will then set in. Markets feed on greed and fear. Interestingly, when the markets offer opportunities for investments, there is immense fear in the market. That is also why only few are successful in the stock markets. We all want instant gratification.

What is your view on the market now? Do you think they are expensive?

See, here again we are following the insanity that the society has created. Now, Sensex has only 30 stocks, while Nifty has 50. Is that the market? No, as there are over 7,000 listed stocks! We are looking at the wrong barometer.

Moreover, how do companies get into these indices? By virtue of their market capitalisations alone. They are all big companies but not necessarily good companies. The market of more than 7,000 stocks outside of it is where the value is. Besides, mutual funds and institutions play with the Nifty all the time, there is no value per se there. A look at the open interest on Nifty will tell you that most institutions are into it already.

So what should retail investors do?

For retail investors, I would say the best time to buy stocks is when they don't feel like buying. And that brings me to the question - who is a retail investor?

An investor isn't someone who invests everyday. He is someone who invests once in probably two years, or whenever there's an opportunity. The rest are all punters. What advice can you give to punters?

Source: Business Line
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