Sunday, May 13, 2012

Lunatic FDs!

This is just wrong. Maybe his message is correct, but asking people to completely abandon FDs in favor or stocks has to be crazy. Let me put this succintly - If you consider yourself one of the average investors on the street, you WILL lose money. 

Let's run through this article in short, yes?
  • Pick stocks rather than an index, something that you understand
  • The problem is that people on the whole DO NOT UNDERSTAND what they are picking and why. I wager that at least 75-80% (and this is an understatement) people on the street pick up or dump stocks because they "heard" that it is going to go up or down, rather like what Mr. Ramesh Damani is telling them. I assume he has a good enough track record behind him, which is why he's on the show. But people, in general, have neither the time nor the discipline to go around researching stocks. That's why you buy index funds, mutual funds, etc. (not that they've been on a roll the past 3-4 years, but still) And more importantly, when do we exit? 
  • Suggests investment in media stocks (I'm assuming he's long on them), don't buy indices
    • The past 2-3 years would back him up, don't buy indices. But buy media stocks for the future because he tells you to. Let's see how they've performed over the past 4 years, yes? 
    • CNX Media
      • 12/05/2008 - 1827.71
      • 12/05/2009 - 924.07
      • 12/05/2010 - 1633.96
      • 12/05/2011 - 1427.26
      • 11/05/2012 - 1152.65
    • Over the same time, the NIFTY has moved from.... just look at this:
    • That's a return of -36.9% over the last five years as compared to a measly loss of -1.7% on the NIFTY. Put in 9-10% inflation and suddenly bank deposits look rather creamy, don't they? 
    • Of course, comparing the past to what his prediction of what will happen in the future is a dirty trick, so let's look at his past, yes?  (To make it clear, I don't know the guy or of him, so this isn't a personal attack, I'm sure he's made a millionaire of himself and his customers, but people shouldn't be shouting down generalities...)
    • Jan. 14, 2011 - Did not directly recommend, but said Tata Elxsi and Geometric Ltd. are "going to do well". Prices were Rs. 281.4 and Rs.75.4; current prices are Rs. 199.35 and Rs.62.60. Ouch. (Elxsi did pay a dividend of Rs.7 and Geometric of Rs. 1.2 that lessens the hurt a bit, but not nearly enough to keep on track with inflation, yes?)
    • But the last year's been bad for everyone, so let's go back a bit more? In Jan. 2007, he recommended ICICI Bank, Bharti Airtel, Hitachi, HPCL and BPCL. He hedges a bit on Container Corp. and Bharat Electronics, so I'm not inculding them. Let's say I bought 10 stocks of each on reading that. How did it go for me? (To be fair, in that interview, he also says that all bull markets come down with a bang, and that there will be a very serious fall)
    • Price Bought  Today's price       Profits  Dividends         Total
      ICICI  8974.5 8132.0 -842.5 580.0 -262.5
      Bharti Airtel 6343.5 6144.0 -199.5 30.0 -169.5
      Hitachi 1008.5 1316.5 308.0 30.0 338.0
      HPCL 2783.5 2994.0 210.5 442.5 653.0
      BPCL 3343.0 7003.0 3660.0 490.0 4150.0
      22453.0 25589.5 3136.5 1572.5 4709.0
    • So over a 5-year period I've made a total return of 21% (out of which almost 88% is from just ONE stock), which translates to 4.2% every year. Again, bank deposits anyone? 
    • I'm assuming holding onto these stocks till now, because I couldn't find any interview/material where he tells people to sell the stock. If anyone comes across that, please let me know? 
  • Dividend yields on equities often beat inflation - I guess we disproved that above, yes?
  • Government inaction is hurting aviation and telecom stocks in the country (I'd say there's too much action on the telecom front, rather than inaction)
  • Pessimistic about infrastructure
Forget about the rest, what I wanted to drive home is that do not listen to people who blindly say don't do this and don't do that. In the current scenario, where you get a risk-free return of 9% p.a. on your FD (9.5% until the recent RBI rate cut), do you not think that you should be allotting some percentage in them? If you have the time and energy to study the markets, then more power to you. If you don't, then listen to experts but please do some basic research before putting your money. Or else, I daresay bank FDs are the best place for you.

Hey Mr. D, this isn't an attack on you personally, but for some reason that statement just pissed me off. I've been earning only the past three years and you know how the market has been in that time... Makes me wish I'd put money some FDs, which I haven't. Just starting to now. In spite of all its faults, I'm in the market one way or another too. Let's see how that ends up! 

Also, read this: How can investors avoid fooling themselves? via WSJ