Believe In The Best

Personal Finance
Believe In The Best

By Dhirendra Kumar

The Infrastructure Imperative
Rolling In A New Settlement

It's best to believe in yourself. As an amateur stock-picker, you will be better off avoiding expert recommendations in favour of your own research. The average investor suffers from a false sense of inferiority that he develops from playing against big investors and financial institutions. After all, the institutions get so much attention that the amateur stock-picker feels depressed by the very thought of combating in an unequal war.

However, that's not the case. You're not competing against the big investors, but the Thundering Herd. The institutional investors include the mutual fund managers who, on all key occasions, tend to think alike. You could call a majority of this Thundering Herd as the Blundering Herd. The lack of confidence in oneself forces the investor to do one of the 3 self-destructive acts:

Imitating the pros by buying 'hot' stocks or try to 'catch the turn' in, say, Infosys Technologies.

Becoming 'sophisticated' by investing in something nobody knows about, but sound good.

Buying what you have heard a pro has recommended. Information on what the pros think is so readily available that the celebrity tip has replaced the old-fashioned tip from your close friend.

When you look at a stock to check if it is as good on paper as it seems in real life, your complex prevents you from buying a stock that has never been recommended by tip sheets. So, instead of scrutinizing the annual report of the company, you start looking at the expert views. For instance, you discover that the fund-manager of a top-performing fund owns shares in Infosys, India's leading software company, and conclude that the fund-manager knows more than you and your uncle put together-which is actually right, but that doesn't imply you'll profit by betting on her tip.

And when the stock goes down, you can't call up the fund-manager to ask if she still likes Infosys, and whethershe views the price-drop as an opportunity to buy more. Most likely, the drop in the price will make you lose faith in the scrip and, without the star manager's reassurance, you will sell the shares to minimize your losses. You'll then take your diminished capital and repeat the process with another celebrity tip, perhaps from an analyst at your brokerage firm. If you want to follow the stocks in which the pros are interested the best way to do so it is to invest in their mutual fund to fully benefit from their expertise.

So, trust your analytical skills since you already possess the investor's edge. The investor's edge is of 2 kinds: the on-the-job edge, in which you have a working relationship with an industry and the related companies with whom you conduct business; and the consumer's edge, with which you can capitalize on your experiences in neighbourhood shops and banks. In fact, the leading stocks on the Bombay Stock Exchange, like Infosys, Indian Oil, Colgate, Bata and Nestle, have been stuck under the noses of millions of consumers who, if they'd paid attention to the popularity of these enterprises, could have profited. And they had all the time to do so-it takes 10-15 years for a business to expand across the country-before the Dalal Street professionals cashed in on them.

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