The Hindu Business Line : No news may be good news

When money ceases to become the means by which men deal with one another, then men become the tools of other men. Blood, whips and guns - or dollars. Take your choice, there is no other.

— Ayn Rand

Consider this: An extremely volatile stock market has prompted you to pull out of equity funds and temporarily park your money in debt. You know you will need to get back into stocks, a choice that may well have to be exercised sooner than later.

Yours is not a solitary case; in fact, lots of people around you are probably in the same situation, waiting for the market to bottom out before they start allocating afresh. For money managers, and for some sections within the disparate group popularly termed as `investment advisors', too, the situation presents a dilemma of sorts.

Timing fresh entry

Even as you read this on Monday morning, that dilemma is raising a lot of questions. As investment circles put it, many of these relate to timing - more specifically, to the time of fresh entry. NAVs of equity funds are really off their highs, should we write the next cheque right away? Or, should we wait till the index falls a bit more?

Now, experienced folks will tell you that questions such as these have bobbed up every time a crisis has occurred. One of them, Mr Soumitra Sengupta, who runs a model portfolio under a brand named Lamron Analysts, feels that the market has in the past repeatedly failed to make the right forecasts. (We believe equity fund investors will learn a lesson or two from this, and hence this reference).

Traditional methods of securities analysis, he laments, often depend on the ability to project cash flows - an exercise (given the multiple variables and assumptions that come into play) that is not without its flaws.

"Unfortunately, there still is a pronounced bias for reliance on forecasts. There is a perception that making good investment decisions is in some ways predicated on the ability to accurately anticipate the future. Sadly, the futility of such an endeavour is overlooked or glossed over," he notes.

Risk management

In this backdrop, a point or two stand out. Risk management - you have no doubt heard this before, but it is worth mentioning again - is one of them. As Mr Sengupta sees it, risk management is "an acceptance of our own limitations". An investment organisation needs to continuously re-examine its ideas and accept the reality if its original plans go for a toss.

It is also argued that access to news/information will not necessarily lead to sound decisions. A reference has been made to a test conducted in the 1980s by an MIT professor, showing that more news did not necessarily bring about superior judgment.

The short point is that any reliance on specific predictions about the various factors that are at work in the financial markets may prove to be unreliable. It may be safer to rely on pattern predictions, but not without adequate attention to risk management.

And here is the last word for investors who have put a lot of faith in fund managers: "If we are to have a decent chance of success, a healthy dose of scepticism, especially when it comes to our own cognitive processes, helps... we need to be clinically objective about our evaluation of the situation as it evolves, rather than remain anchored in our original positions." We rest our case.

Feedback may be sent to nilanjan@thehindu.co.in

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