The Hindu Business Line : `Index is not the mind of market'

Its wrong to get anchored to any kind of index as it may not be an accurate benchmark/reflection of events or things to come, says Mr Parag Parikh, Chairman, Parag Parikh Financial Advisory Services Ltd.

"Last year, after a good budget, market should have looked up. But it did not as the market had to factor in too many excesses — the Iraq War etc. So, it was wrong to assume an index of 3000 to be a benchmark. A market tends to move up or down during any kind of excess. Similarly, given the current scenario, it would be wrong to get anchored to an index of 5500-6000," he reasoned.

Mr Parikh, recently back from a study on behavioural economics at Harvard University in the US, is of the view that the fundamental mistake investors make while investing in the capital market is to take decisions based on emotions rather than rationale.

"Stock market investing is nothing to do with the IQ of an individual. It's all about keeping one's emotions under control while others are making mistakes," he explained.

According to him, investing is a game of discipline and should always be done taking a long-term view. If one buys a stock it will go through all the seasons of the capital market, he said.

"You buy a fundamentally good scrip, a reasonable rate of return is assured. But what is happening is one is always trying to find the best stock in the market. This is where the loss aversion theory comes into play. This tends to drive one to hold on to losers and sell the winners in one's portfolio. However, when the greed factor, instead of fear factor comes into play, you have what is known as the endowment effect. At such times one tends to become overconfident and under-react to everything. For instance, when a stock comes into your possession it becomes more valuable. And one will tend to believe that the market is under quoting the price of such a stockholding," Mr Parikh explained.

Disagreeing with the view that mutual funds are a safe investment instrument, which provides steady returns all through the year, Mr Parikh opined that there is more emphasis on fund mobilisation than on fund performance today.

"Today fund managers spend more time marketing their funds than making decisions based on performance evaluation. Their benchmarking is not towards superior returns and they are instead more concerned about beating the performance of their peers. There is always talk of long-term investment but you only have short-term money coming in. It is akin to herd mentality. Thus the investment scenario is seriously flawed," he reasoned.

The Parag Parikh investment theory for the common investor underlines the fact that there is no short cut to making money. "If there was, than every broker or finance manager would be doing it. One has to have an investment plan in place. If you don't, then go to the right people who will provide investment management advice and it need not necessarily be a fund. Last, but not the least, remember to always keep your emotions under control," he advised.

Cautioning investors, Mr Parikh said that there is general overconfidence today of the economic indicators. According to him, people are overlooking factors such as fiscal deficit, the most important economic indicator to influence market in the near future.