The Hindu Business Line : Smart investing

The first step to investing success is to choose a benchmark, says Aaron Anderson in Own the World: How Smart Investors Create Global Portfolios ( www.wiley.com ).

A benchmark is just an index tracking whatever asset you’re investing in, he explains. The asset may be real estate, bond, commodity, or stock. “But just as following the wrong map could mean ending up in Sri Lanka instead of Shreveport, choosing an inappropriate benchmark can throw your portfolio way off course,” the author cautions.

Two purposes served by a benchmark are as a yardstick to measure portfolio performance, and as a roadmap to guide you in building the portfolio. Too many investors focus on absolute performance, Anderson frets. “But absolute returns don’t tell the whole story.”

Finding attractive stocks is an important step in the investment process, but there are far more important decisions to make with the help of the benchmark, he advises. For example, “Putting 50 per cent of your portfolio in utilities might seem like a good idea, particularly if you really like utilities. But if utilities comprise just 5 per cent of your benchmark, you’re taking an enormous risk.”

Step 2 is to analyse the benchmark’s components and assign expected risk and return. Step 3 is to blend dissimilar investments to moderate risk relative to return. And the final step is to always remember you could be wrong, and so not to stray from the first three steps.

For many, staying disciplined can be difficult, Anderson observes. “Controlling your instincts to stray from your long-term plan can be the most challenging part of investing.”

Recommended study.
China vs India

Compared to China, India has relatively stronger financial and capital markets, say Yang Dali and Zhao Hong in one of the essays included in Socio-Political and Economic Challenges in South Asia, edited by Tan Tai Yong ( www.sagepublications.com ).

India has been making life easier for local businesses, the authors add. Democracy, a tradition of entrepreneurship, and a decent legal system have given India the underpinnings necessary for free enterprise to flourish, they reason.

“India has large numbers of internationally competitive private companies following international best practices of business rules and transparency …..”

In contrast, small businesses have been contained and regulated by the Government in China, the authors rue. “Only recently has Chinese Government begun to allow smaller businesses to gain access to many of industrial sectors that were previously dominated by state-owned enterprises or even FDI.”

They also find that, with relatively a few exceptions, the world-class manufacturing facilities for which China is famous are products of FDI, instead of indigenous Chinese companies. “‘Made in China’ is not necessarily made by China, while what is ‘Made in India’ is more synonymous with made by India; thus Indians not just get the wage benefits of globalisation but also keep the profits.”

Important insights.
Let the winners ride

To see if an investment approach or discipline is worthwhile, investors need to do their homework by back-testing the results over an extended period of time, instructs Sam Stovall in The Seven Rules of Wall Street: Crash-tested Investment Strategies that Beat the Market ( www.tatamcgrawhill.com ).

“In other words, determine how this technique would have performed over many years, incorporate several economic cycles, as well as during bull and bear markets.” If an investment rule does not beat ‘the market,’ why waste your time and money, he asks.

The first of his seven rules is about letting the winners ride. “Contrary to popular opinion, it’s been more rewarding to invest in those industries that recorded the best price performances over the past year, while avoiding those with the worst,” Stovall argues.

The second rule states, ‘As goes January, so goes the year.’

The first month of the year has been very accurate in forecasting the coming year’s price performance for equity markets, sectors, and industries, he notes.

Another rule counters the ‘no free lunch’ theory by recommending diversification through a pairing of uncorrelated sectors.

Useful addition to the investors’ shelf.
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D. Murali

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