The art of Bad-vising

By Ankur Mahajan, [email protected]

“We’ve done a lot of stupid things but we’ve avoided a small subset of stupidity and that subset is important. It’s about avoiding the dumb things” – Warren Buffet

There have been a considerable number of arguments and an equal number of blogs and posts written about the plight of a retail investor. One of the prime subjects have been the many grounds where a typical investor conks out to make returns in the market. “Market makes returns, but the investor doesn’t” has become the slogan of the Aam Investor (on the lines of aam aadmi). And there have been umpteen reasons attached to the same. Some of them being getting carried away by greed and fear, investing after the bull run, redeeming during the bears, chasing fancies, investing without understanding, etc. While it is easy to blame the investor on the lines of an aam aadmi who pay taxes but abstains from voting, there is a compelling need to question the role of your advisor and his ability to avoid deviating from the fundamentals.

This blog is not questioning the integrity of the advisor; but his capability to reinforce the fundamentals of the respective asset classes suggested by him. It poses no difficulty in churning those portfolios to justify the advisory, but it is equally fractious to stick to the process maintaining the similar fundamentals time and again. For eg: An average mutual fund has delivered an annualized returns of 20% over the last ten years. An investor had to do nothing; just nothing rather than holding it for 10 years. But how many investors have the same mutual fund for the last 10 years. In fact, I have observed an average investor changing his mutual funds portfolio every 2-3 years and cribbing about the returns and then alleging the markets, government, policies, ministers, corruption, etc.

No wonder the advisors provided the same reasons to assuage the investor egos. “But Sir, corruption was before also and an equally inefficient government in those last 10 years”. What you failed to notice is the inefficiency of your advisor; who in the name of service kept churning your portfolio; increasing his commissions, your cost of transacting. All at the cost of your net returns.

“You only have to do a very few things right in your life so as long as you don’t do many things wrong”– Warren Buffet

Many investors argue about their personal portfolios faring much better than the ones managed by their advisors. And as long as the business is robust, they do not feel the need to sell or act upon it. On the contrary, the advisors made the investors buy IT funds in 2000, realty funds in 2007, equity funds after the 2009 rally, gold funds in the past few years and debt funds in the recent debt market carnage. Just because they could not justify the advice for suggesting the previous funds, they added “Just another” fund to cover their previous follies. And it keeps on repeating. The same advisors are responsible for making their investors chase the returns while forgetting the process. The reason those advisors are accountable because the investors repose their trust on them; only to be breached everytime.

The actions of the investors arguably reflects the mindset of the advisors. The NSEL fiasco is a classic case study of the investors seduced to the product purely driven by returns; ostracizing the fundamentals. Where were the advisors when the investors were putting their life savings at stake? Or the same “Advisors” sold those products? It is an equal responsibility of the investors to stop blaming the advisor just because the result is unfavorable. Changing the advisor every 3-4 years and keeping 3-4 advisors is an equal crime. Investing is a process and takes time to yield results. Even 10 years ! The idea is to invest in the fundamentally strong products, believe in the process and stop chasing the returns.