Fixing TV Coverage of Stock Markets

Here are extracts from Barry Ritholtz's advice to US financial television channels. I'm sure some of these recommendations apply very well to our business TV channels as well.

2. Bring us People We Don’t Have Access to. What various FinTV channels do really well is when they bring us long, thoughtful interviews with the likes of Warren Buffett, WIlliam Ackman, David Einhorn, and others. People we wouldn’t ordinarily have access to.

4. Risk: All traders must appreciate the potential downside of trades. So too, must FinTV. Explain stop losses. Understand Risk/Reward. Recognize there are periods when Buy & Hold is a jumbo loser.

6. Separate the Signal from the Noise. Understand that most of the day-to-day action is simply noise. Look at a long term chart, you can barely see 9187 or 9/11. If those major events get lost in the long term trend, what does the intraday jags, kinks and reversals mean? Very little. Recognize that not every data release, slice of news, or rumor is at all significant. Stop treating them as if they were.

7. Fact Check: An awful lot of things on air get stated with authority and confidence. Much of them are little more than junk or pop myths. Why is it that the more dubious a proposition is, the greater the confidence the speaker seems to muster? Consider fact checking as much of the statements that are made on air as possible, and making frequent corrections.

8. Accountability is important: I am astounded at some of the money losing hacks that are various shows again and again. These are the “articulate incompetants” to use Bennett Goodspeed’s phrase. Why not keep track of the records of guests — and let the viewers know how their past few calls have been. Are they Perma-bulls or bears? Are their stock picks awful? Are they reliable money makers? If not, let us know. (Of course, the better question is, if not, why even have them on?)

13. Most stock picks are losers. That’s normal, but the audience does not realize this. A big part of the challenge is informing the viewer that finding the biog winners is a low probability, high outcome event. As in a baseball, a 350 hitter is a star. Explain this to your audience.

14. Stop the Bull/Bear Debate: This is a vast over-simplification of the market, and often does not serve the audience well. There are nuances and variables that get lost when you reduce everything to black and white.

Hat tip: Paul Kedrosky

Know thy REAL enemy: INFLATION (not Volatility)

Amit Trivedi has an interesting article on the topic at moneycontrol:

If a financial plan is carefully drafted, one must adhere to that unless proven that it is a completely wrong plan or that the initial assumptions were wrong. However, often people tend to change their financial plan in light of adverse short term price movements, without giving a thought as to what inflation can do to their future finances. At the same time, people have also changed the allocation to the riskier assets looking at the recent short term superior performance.

Any investor would be better off understanding the two prime risks of investments – volatility and inflation. Volatility of prices is the short term risk – inflation is long term risk. An investment plan must be made keeping these two risks in mind.

Inflation does not affect one much in the short term as the prices of essential commodities do not rise too much in short period, normally. Because of this, we tend to take inflation very lightly and ignore it while planning for our long term goals. Volatility on the other hand is an immediate risk as the prices of various securities fluctuate in the short run. This is the difference between the two risks – the former being almost invisible in the short run whereas the latter being magnified by the discussions around it. We tend to, then, overweight volatility and underweight inflation.

The Market as a Weighing Machine

"In the short run the market is a voting machine. In the long run it's a weighing machine." - Benjamin Graham.

There couldn't be a better line to describe the current post-election euphoria in India (accompanied, of course, by a global rally). Hopefully, corporate earnings do catch up with the voting machine!!

"Investing shouldn’t keep you busy"

From an interesting article by Yogesh Chabria in MoneyControl:

I’m sure most of you might be wondering if it is really possible to get rich by doing nothing. Some of you might even be thinking that I have surely lost it. That is what one of my close friends, who was taking my advice, thought. She had received a sizeable amount of money after selling some ancestral property around a year ago, and wanted me to help her out with it. It was the first time she was investing in the stock markets, and like most other people, thought that she would spend hours a day, carrying a laptop, trading in stocks and watching business channels. She wanted to be busy with the stock markets.

Fortunately for her, I didn’t allow her to do any of that. I asked her to pursue a hobby, go on a holiday, meet her family, start a business, perform community service or do anything else to keep herself occupied. The stock markets aren’t a great place to be “busy.” I strongly believe that investments aren’t meant to keep you busy; they are meant to make you rich.

Based on my advice, she invested her money in a few companies that had strong fundamentals and a visible growth. I told her to stop looking at the prices everyday and tracking daily upward and downward movements. Just staring at stock prices would not magically make them rise.By doing nothing, she didn’t get scared of temporary falls in stock prices. She didn’t get nervous and sell her stock when it fell by 10%. When the stock rose by 30%, she didn’t feel greedy and sell it either. She didn’t even know about such minor falls or rises.

"Flee the bear but miss the bull?"

Well known indexing-focused US mutual fund Vanguard, points out using an interactive illustration, how of the nine US bear markets between 1950 and 2003, in all but one case, the market snapped back dramatically within one year of "hitting bottom."

At Vanguard, we're confident that the market will recover, and we're equally resolute in our belief that investing in stocks can be the best option for building wealth over the long run. And being out of the market when a recovery occurs can be costly, as history shows.

..."Historical data can't be used to predict the future, but they do tell us that the stock market has been remarkably resilient over long stretches of time," (Vanguard's chief investment officer Gus Sauter) said. "Investors who were patient during periods of stress and dislocation were ultimately rewarded for their willingness to bear market risk."

..."In the past, bear markets have been buying opportunities," Mr. Sauter said. "Although we certainly don't know when market or economic conditions will improve, and we'd be foolish to try to pinpoint the 'trough' of the current bear market, the historical implications for investors are pretty clear."

The bottom line: If you react to a sharp decline in your portfolio by fleeing the stock market and abandoning your long-term investing strategy, you'll surrender any chance of benefiting from the market's recovery when it occurs.

"The Five Investment Essentials"

Harish Rao has a column in The Mint on investments that are "a must for anyone in today's investment climate".

1. Term insurance : Aggressive life insurance is possible only through Term products. For example a 30 year old can get a Rs. 1 crore cover over the next 25 years at just Rs. 3000 per month. Definitely a must-do.

2. Health insurance : An unquestionable necessity. Again, for less than Rs. 1000 a month, a whole family can be adequately insured with a floater plan. And there are tax benefits to this.

3. PPF : the # 1 Fixed Income investment vehicle. Truly EEE (Exempt from Income Tax at every stage, plus, eligible for tax benefit under Sec 80C). No bank can match the post-tax returns of PPF.

4. Retire Debt : Want the best returns? Then retire all debt, be it credit card or personal loan. This also sets your cash free in the future. Cut spending now if you have to, but just pay off your creditors.

5. Start a SIP : Systematic Investment Plans (SIPs) are the best way to create wealth for the long term. Start one in 2-3 good diversified equity schemes. Start with a 3 year time frame and review the performance once a year. If the funds are still in the top quartile, then persist for the next 3 years. With the markets at a depressing low, there has never been a better time to get into equities.

Equities anyone? Part 2

Harish Rao has a scenario analysis, backed with data, on returns from equity mutual funds based on different entry points.

What are the lessons?:
1. Investing when the market is at the peak is profitable only when time is given for the market to recover and deliver.
2. Investing in a good mutual fund multiplies the returns. Look for MF schemes with a LONG TERM track-record (atleast 5 years +)
3. Investing when the market is down is the best recipe for long term success. (And the market is down over 55% from its peak).

What you need to do?
a. Define long term horizon. Ideal : 10 years. Acceptable : 5 years +
b. Assess your asset allocation. If you're underweight on equities, start buying it now.
c. Identify 3 superior equity mutual fund schemes : Start a Systematic Investment Plan (SIP). It is the ONLY way to benefit from volatility.
d. Get a grip on your emotions. If you are there for the long term, better see it through everything, irrespective of whether the following happens : failed monsoons, hung parliament, oil @ $ 150 or inflation @ 15%, terrorist strikes.
e. Get yourself an investment advisor, who is concerned more with your returns than his/her commissions.