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confusion

Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas.” This is such a profound statement from Paul Samuelson, who was the first American economist to win the Nobel Prize in Economics. And, yet, it is one of the most abused ones.

Technology has made it easy for us to spend all day checking our iPhones, tablets, and laptops. Thanks to Whatsapp, Twitter and RSS feeds, information has become so accessible that many of us are guilty of following stock tickers and other related streams of financial information for hours every day. How do you get anything else done, like work, or have a social life? And does all the information really improve investment performance?

Most investors think investing is rocket science and requires one to track 100 variables (US job data, Baltic Dry Index, El Nino, and much more) on a daily basis. In many meetings that I have with high net worth individuals (HNIs), they like to ask me complicated questions like how Chinese companies raising $200 billion would impact Indian markets? Or, how raising of interest rates by the US Federal Reserve can destabilize Indian markets? I feel that they raise such questions to look intelligent in front of advisers; but in the pursuit of looking more informed, they invariably harm their portfolios.

Many HNI investors don’t make money or even lose money because of tracking too many minute things and thereby missing the bigger picture. One person, a real estate developer, sends me 2-3 Whatsapp messages everyday and wants my comment on each of them. Another HNI, a large manufacturer, tracks markets on an hourly basis and wants me to shuffle his mutual fund investments like stocks to take advantage of tactical market conditions. Another, who is a pensioner, flips through three pink newspapers everyday to get market insights but ends up getting more confused about predicting which way the market will move. Some articles or interviews that we see in the media may have a vested interest and may not be unbiased. All opinions need to be taken with a large pinch of salt; and most of them just need to be ignored.

Last month, I took about a week off. Some investors asked me how I could afford to be out of action for such a long time. My reply was that if I am making you invest for 10 years, how do 10 days really matter to you or me.

The problem is that most of us believe that more action means higher returns. Many ultra HNIs are surrounded by 4-5 private bankers who feed them information on a nano second basis. Once, I happened to see the inbox of one such investor. He received 35 mails on different investing topics, daily. Another time, I was pulled up by a big investor of mine for being two hours late in sharing a news item with him. The news was that the central bank had reduced the repo rate by 25 basis points. He wanted to know immediately what impact this would have on his bonds portfolio.

If the market is dependent on 50 different factors, then it’s best to control the controllable rather than wasting time weaving unrelated variables and deducing correlations from them. More often than not, doing so creates panic situations that result in unnecessary actions in the portfolio.

It’s also important to recognize that most of the information that we get is amplified by the media. In an effort to draw more attention, even relatively minor stories may get sensationalized. I have realized that more attention investors pay to the media, the worse they do. The more they analyze, the more decisions they have to make. The more decisions they make, more are the chances of being wrong.

Contrary to this, most successful investors tend to have clarity of thought and look only at the larger picture. They discount all day-to-day noises and concentrate only on the fundamentals.

In the end, fundamentals always prevail over speed (technical analysts will, of course, differ with me on this).

There’s no doubt that a certain amount of investment information is necessary to be an informed and effective investor. But like everything else in life, it’s subject to the law of diminishing returns. As human beings, there’s only so much information that we can process. Beyond a point, it’s just clutter that we are unable to sift through.

The basic fundamental of investing is patience, and in this fast paced era of breaking news on an hourly basis, all of us will be tested on this most important metric. The last man standing will be the one who will laugh all the way to the bank.

Gajendra Kothari, managing director and chief executive officer, Ética Wealth Management Pvt. Ltd

Original Source – Livemint

Image Credits – gregorybknapp.com

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