In India investment ideas are normally sold rather than bought. Selling an investment idea is all about narratives and it is easy to push across an idea that is in currency. We saw that in the case of IT in early 2000, real estate stocks in 2006, Infrastructure stocks in 2008 etc. There are also other qualitative narratives you will get to hear in the market. For example, you hear the valuation story and the need to look at the bigger picture. Remember, the job of an investment narrative is to sell an investment idea. It is entirely in your hands whether you want to buy the narrative or not. When you buy the wrong narrative, you end up making an investment mistake and these are the investment mistakes to avoid. So, what are the common mistakes you should avoid and more importantly what are the specific investment narratives you should be cautious about. Here are some common mistakes you commit in stock trading by buying into the wrong stock narrative..
1. There is a virtual distress sale in the stock markets
This is a popular narrative you get to hear quite often. You get to hear that the particular stock or sector may never again be available at that particular valuation. The crux of the narrative is to just go all out and buy the stock in a hurry rather than wait for better levels. In reality, distress sales are always available in the heights of distress or at the heights of pessimism. You will hardly find too many sales persons coming and giving you a narrative when there is an actual distress sale. Most likely, this is an overenthusiastic advisor trying to push a hot idea in the garb of distress valuation. Don’t fall for that!
2. Don't look at the earnings, look at the market potential
We first heard that in the case of IT when we were told that internet companies must be valued based on eyeballs and not based on revenues. Similarly, we also heard that retail concepts must be bought based on footfalls and not based on profits. During the peak of the real estate boom in India we were told that companies must be valued based on the value of the land bank and not on profits. At the end of the day, what matters is the quantum of profits that the company generates. Eyeballs without revenues are not a great idea. Similarly, revenue aggression without proportionate profit build-up is unlikely to sustain. Buy stocks that are growing revenues but are also making profits for shareholders. We see the same kind of enthusiasm in Fintech stocks and we must be careful of this narrative.
3. India's demographic dividend is as good as gold
If you are reading investment narratives then you must have come across this term quite often. The argument is that India is an attractive market because it has a demographic dividend in the form of a young population. This is technically correct but a slightly nuanced argument. Merely, having more people in a younger age bracket is not enough. The productivity and the quality of this population are also important. For that we require quality education, skill building, job opportunities etc. Otherwise, these demographic dividends cannot really translate into anything meaningful. The next time you hear this demographic dividend argument try to get to the bottom of how India is leveraging on the same. That will answer your question better.
4. In future robots will replace all humans
In fact, nowadays we hear this argument a little too often. We are told that in future all financial planning will be done by robots. We are also told that most routine jobs will be replaced by robots and human intervention will become almost minimal. While the trend is shifting more towards automation and efficiency, nothing so drastic is going to happen. Like in previous occasions in history, there will be some shift from man to machines but automation itself is going to be a slow and laborious process. It is not like overnight robots are going to replace all humans or that all pizzas will be delivered by drones. Be cautious, especially when someone tries to sell you high tech ideas on the premise that robots will take over every aspect of life. That will happen gradually and not suddenly. Don’t bet your investment logic on that happening any time soon.
5. There is no future in active management, so buy index funds
This is a logic that a lot of index fund managers have started giving out in the recent past. This trend is more pronounced after Warren Buffett praised the contribution of John Bogle of Vanguard for his contribution to low cost index funds. There are phases when active fund management works better and there are phases when passive works better. Post the global economic crisis, passive did work better as global macro policies were largely synchronized. With these policies gradually diverging, we will again see the return of active investment. You need not be in a hurry to shift all your money to index funds or ETFs. You must certainly have a small portion allocated to passive but then the shift to passive is going to be nothing as drastic as some index fund managers are making it out to be.
Sir John Templeton once said that the most dangerous narrative in the world of equities is that “This time it is different”. We get to hear this narrative so often and in fact if you consider the above 5 a key narrative to avoid, the underlying theme is that “this time it is different”. In the world of investments, the more things change the more they remain the same. Things do change but never as drastically as narratives make it out to be!