The Hindu Business Line : Lessons for investors from `a terrible defeat'

Chennai March 20 A for agony, B for Bangladesh, and C for cricket. That, in short, was the abysmal situation for many fans during and after the shock and awe the Indian team suffered at the start of its World Cup 2007 campaign. However, after the Monday's `record' win against Bermuda, some assuaging may have occurred to bruised sentiments.

"Right time for retail investors to draw financial planning lessons from the mistakes not only made by the team on field but also from the systemic and structural flaws in the way the game is run here," says Mr Sanjiv Mehta, former CEO of The Stock Exchange, Mumbai BSE's Derivatives Segment.

Mr Mehta, who currently heads Finance Doctor Pvt Ltd, a wealth management company, has written a book titled `Winning the Wealth Game' (www.tatamcgrawhill.com) and it is about `cricket strategies for financial freedom'. Here's more that Mr Mehta shares with Business Line, as takeaways for investors from what Dravid called `a terrible defeat'.

On `misreading' the pitch

Indian team knew from its last year's experience in the West Indies that pitches are not conducive to very big totals and a score of around 250 was proving to be a winning one. Here one is talking of when two good teams are battling it out rather than when a minnow is playing against a major team. In this World Cup, this was borne out when Pakistan could not chase a total of around 250 against West Indies in the inaugural match and England folded up for less than 210 against New Zealand. Therefore after winning the toss and starting as if to score 250 would have focused the team in building a solid foundation; it would have tried a score of 45 for no loss in the first 10 overs rather than a score of 70 runs and risking losing several wickets.

Likewise, in financial planning, reading the economic cycle and laying a solid foundation is equally important. On a pitch that is not very easy, one has to take care of liquidity and safety before venturing into yield enhancing riskier instruments.

On team selection

Playing both Sehwag and Uthappa was a mistake; it should have been Karthic instead. The team would have done better with a combination of dashers and dependable batsmen. In financial planning terms, West Indian conditions are akin to an economic scenario where inflation is creeping up, interest rates are climbing and earnings growth might be flagging off a bit. This calls for a balanced allocation where both stocks and debt instruments are represented adequately. A heavier allocation to stocks and especially small caps (both Sehwag in his off-form and Uthappa in his inexperience) under these conditions could be risky. On the other hand, a 13-month Fixed Maturity Plan giving a 10.5 per cent assured returns could provide lots of stability to the portfolio.

On psychological fragility and wickets falling in a heap!

India was 157 for 4 at one stage with Saurav and Yuvraj playing pretty well and there was a big possibility of India scoring 230 runs with 10 overs still remaining. But then 5 wickets fell in a heap and suddenly the score was 159 for 9. There was a big behavioural component to this cave in.

Short-term volatility really spooked the investors. It is very important for the investor to be emotionally resilient.

If his investments are based on good economic fundamentals, he should not be affected by short-term fluctuations. He should be invested in assets like stocks and real estate for the long term. A short-term correction like what we are seeing at present in the Indian equity market should not scare him where he withdraws. He just has to be resilient to reap rewards.

On the absence of all-rounders.

Ajit Agarkar is proving to be a bits-and-pieces player rather than a genuine all-rounder. One has expectations on both the fronts but he failed in both. India won the 1983 World Cup because of having a great all-rounder in Kapil Dev but also supported by other genuine all-rounders such as Mohinder Amarnath, Roger Binny and Madan Lal.

There are some very good structured products that guarantee a floor, and their returns are linked to a stock index. But quite a few are masquerading as all-rounders; they give low returns and no enhanced safety. Investor has to carefully differentiate and invest in genuine all-rounders in order to have a powerful portfolio.

On secondary mistakes

India after producing a low total just could not afford to be extravagant on the field. Not holding on to sharp chances, especially of Mushfiqur Rahim proved very costly.

With proper financial planning, it is possible to have a very consistent lifestyle — both current and post retirement. While it is preferable to produce good investment returns, playing on the expense square and cutting off unnecessary expenses is also important.

On systemic and structural flaws.

Overall, this match also showed certain systemic and structural flaws. In a country that is so passionate about the game, where such a large number of youngsters are playing, where so much money is in the game, the team's performance is still so inconsistent. This is symptomatic of deep structural flaws in the administration of the game that need to be addressed. True talent should be spotted and nurtured where Iqbals of this country do not get bypassed and a happy movie ending is quite possible.

Regulatory framework in the capital markets should be such where player pool has to be expanded. New talent has to be nurtured much better. Market practices and systems have to be made lot more transparent, excellent innovative products have to be brought to the market much quicker, and various asset classes should be made accessible to retail investor. Only then, a small investor can participate fully in the long-term India story.

MuraliDe@gmail.com