Todays ruling ethos is to make money off the gullible

My purpose is to empower investors and make them aware of the problems within the stock markets. My goal is also to train them to be genuine investors and not speculators. As a Sebi-registered portfolio manager,I believe I am in a profession. Alas,money management and stock broking have become a business. For instance,we dont allow our investors to trade in futures and options because it is not in their interest,but this segment has become a milking cow for brokers.

Further,when people become old,they become redundant to society. But if they have learnt to manage their money they will be independent. They will have a reason to read the newspapers for two hours everyday,and that will help them spend their time fruitfully.

What are some of the common behavioural weaknesses investors display in the markets?

Most investors resort to heuristics. It means that investors do not process complete information but take shortcuts,and this leads to behavioural biases.

The first type is availability heuristic. It means that people rely on information that is most readily available. Today people are scared about swine flu because the media is talking about it. But more deaths take place in India due to malaria,cholera,and drunken driving.

Next,there is the representative bias. It means that the behaviour of a member of a class is treated as representative of the entire class. Just because one initial public offer IPO gives listing gains,investors believe all IPOs will do well.

Then there is the salience heuristic. A one-off event is extrapolated into the future. If a company misses its quarterly earnings target for a couple of quarters,investors give up on that stock permanently.

Then there is the herd mentality. People find security in following the crowd.

What does the term growth fallacy mean?

People talk about growth stocks by which they mean a stock that went way up. But that is always in hindsight. I would love to get hold of a stock that I buy today and it goes up tomorrow. There is nothing like a growth stock. Any stock that you buy must offer good value. Then when a lot of people see the value in it,its price goes up and it becomes a growth stock.

When investors have to justify why they are buying a stock at a high price to earning PE ratio,they say they are buying a growth stock. At other times,they dont understand the business and cant justify their purchase,as when investors bought stocks like DSQ Software during the technology boom. The justification they offered was that it is a growth stock.

Investors also need to distinguish between value-in-use and value-in-exchange. Water has great value-in-use but poor value-in-exchange. A diamond is just the opposite. At present,power is considered a growth sector because India has a power deficit. But the price at which a producer can sell power is regulated. How can it then be called a growth sector?

You dont appear to have too high an opinion of mutual fund managers. Why?

A good stock picker has a lot of passion for stocks. You cannot teach this in a business school. A good stock picker has a lot of confidence in his picks. Such people are rare and they dont work for others. Mutual fund managers have to operate under a number of constraints and guidelines. Which person with passion will work for them?

Let me give you an example. Reliance Power was a greenfield operation. The stock,which had a face value of Rs 10,was offered in an IPO for Rs 450. Valuation-wise this was not a good pick. But practically every mutual fund manager applied for it. Many of these fund managers get a salary of above Rs one crore. They were not investing; they were punting. The layman was also doing the same. Then do they deserve such high salaries?

How does a lay investor go about finding the right money manager for himself?

Managing money is a fiduciary relationship. Go to the portfolio manager and see whether he gives you the time to understand your needs. Try to find out whether he has a long- or a short-term approach.

In a mutual fund,there exists a fiduciary relationship,but there is no process for fulfilling it. If the fund manager quits the fund,does the mutual fund inform you in advance? Does the investor know what stocks are being held in the portfolio? He only learns much later.

If you are investing with a portfolio manager,look at the portfolio and try to understand what the manager is holding,and why. After all it is your money. If tomorrow stocks in the portfolio go down,question the portfolio manager.

What suggestions would you offer to young investors wishing to invest directly in the markets?

Understand that great investment opportunities come rarely. Dont buy and sell daily. Today investors think they are investing but they are actually speculating.

Even the government does not warn people against trading too frequently,because every time you trade the government earns STT securities transaction tax.

Lay investors have to understand that the ruling ethos of this market is how to make money off the other person. There is very little integrity,so investors have to be on the guard.

What is your message to investors regarding IPOs?

Today IPOs are sold at market price. The merchant banker is appointed and paid by the company. The payment he receives depends on how high a price he can get for the issue. And who is going to pay that price? You. Investors have this misconception that in an IPO they are sold shares at bargain prices. If promoters wanted to offer you shares at low prices,then why dont they issue IPOs in bear markets? Because you are not willing to pay a high price in such a market. Only when you become a fool and are willing to pay a high price,as happens in a bull market,are IPOs issued.