5 things that long-term investors do differently

Afrequent question asked by investors is: how long is long term.
There will be several market cycles ,I would now say that long term is infinite.A long-term investor would want to hold on to his investments forever.Its more about attitude than number.

When we choose a career,we do not invest in ourselves hoping to cash out some time soon in order to pursue something else.Even those who switch careers successfully give their all to what they do.They invest in their careers as if it was all that they would do for a long,long time.Long-term investing requires this attitude.Don't we spend a long time to build ourselves by going through school and college. The same applies
in investing.

First,long-term investors take the time to understand what they are doing and why.Those who buy an IPO because they have made money mostly by buying IPOs earlier are not long-term investors.They are only replicating a lazy tactic to make money.If there is no method to selecting investments,they are not longterm investors.Such people want to know all about the investments they are buying.They spend time and effort on learning,research and analysis.Many take offence when I tell them they have bought a stock or a mutual fund on a whim or a tip.I then ask them to list their investments and tell me why they bought those.By the time we reach the fourth item,the truth is out.Most investors buy without adequate groundwork and think that if they hold it for a long time,they are long-term investors.This is not true.

Second,long-term investors understand that returns will be reasonable;they do not expect miracles.If they manage a multi-bagger stock or a winning fund,they know that in the process of acquiring this star,they have also bought a few not-so good investments.They may have exercised the same diligence in selecting the latter.Despite this,all their investments will not rise and shine.Long-term investors know that there is no formula for picking winners,that they will be fine on an average,and hence,keep their return expectations normal.If they earn a return of 15-16 % in the long term,they have beaten inflation,earned more than the bank deposit rates,and built reasonable wealth.Getting to this number involves a few losing picks and a few multi-baggers,and longterm investors know this is the process to build wealth.They do not insist that each investment earn a high rate of return every year.

Third,long-term investors accept economic cycles as an inevitable reality.They know that a growing economy will create a large number of enthusiasts,who will set up,expand,grow and showcase their businesses as investment opportunities.They know that a cycle of high demand will take prices up and every business could make profits.However,they also figure that this optimism would become irrational when poor quality businesses get money,and when investors are greedy to grab unknown stocks.When the cats and dogs,as penny stocks are called,tend to make headlines,the long-term investors know the market has overdone its enthusiasm.They use this euphoria to get out of the mediocre stocks.During times of desperation,when the cycle is at a low,the long-term investors see opportunity.When even the good stocks are shunned,and when businesses have turned around their balance sheets,they step in to take advantage of the
cycle.They know that they have to be in tune with the cycles and time their investments.

Fourth,long-term investors admit their mistakes and make corrections.Since their investment logic is pre-stated and they know why they have bought a particular product,they are willing to put their investments to test.They have learned to identify the critical factors that impact their investments.If they see the leverage increasing even as margins are falling,they know that their company needs a high-revenue growth to stay attractive.If they find that asset acquisition is not translating into revenue,they know that without the pricing power that brings a higher margin,their stock will be under stress.They can track their investment,anticipating a growth path they had envisaged.They then differentiate blips from course correction and act accordingly.To get long-term investors to sell,it is important that the case they made while buying the investment,fails.

Fifth,they do not see investing as easy and quick.They are more fundamentally grounded.They also know that they are not alone in the market and that several other players express their views on a stock.So,they accept gyrating prices as a market reality,but do not see it as an opportunity to make quick money.They do not buy into tricks and thumb rules.They see investing as a strategic decision,where they have to choose,decide the proportion to invest in each pick,monitor and manage how the portfolio is doing,and take action when the big picture seems to be changing.This is why finding long-term investors is tough.Those who bought anything offered in 2007-8,are angry and desperate on finding that their investment has not provided any return in the past six years.They ask how long they may have to wait.If they did not buy with the intent to hold on forever,they were short-term investors.Time will not make their investment decisions right.


The author (Uma Shashikant) is Managing Director,Centre for Investment Education and Learning.

SMART THINGS TO KNOW: Transfer of EPF account

1
The contributions to the Employee Provident Fund (EPF) account are made by the member (employee ) and the employer.A new account is opened every time the employee changes jobs.

2
The contributions made by the previous employer and employee,as well as the interest earned on it,continue to be held in the previous account unless it is transferred to the new one.

3
The older accounts can become inoperative and may not earn any interest.The EPF accounts become inoperative if no contribution is made for a continuous period of 36 months.

4
Since no interest is paid on the balance in inoperative accounts,it is essential for employees to get this amount transferred to the new EPF account and earn interest on the consolidated amount.

5
The EPFO has launched its online transfer facility from October this year.The employees will be able to request for such transfers through its Online Transfer Claim Portal (OTCP).

US default fears: Dummies’ guide to the debt ceiling problem

The US government, like most governments, spends more than it earns.
Example:
$ 2.4 Trillion it earns from Taxes
$ 3.5 Trillion it spends on Salaries for government workers, various subsidies, foreign aid, healthcare, running various institutions such as national parks, security apparatus, etc., space programmes, etc.
$3.5tn - $2.4tn = $1.1 trillion

So how can it bridge this gap?
- By printing more money
- By issuing bonds
- By cutting spendings
- By raising taxes

Raising taxes and cutting spendings are not popular. And the political party in government wants to come back to power. Printing more dollars stokes inflation — meaning goods become more expensive. Again not popular with voters.

So the best option is to issue BONDS, also called US TREASURIES.

These bonds are sold to - individuals, banks, and foreign governments.
Thanks to US' global heft, these are favourites with investors. According to May 2013 US Treasury figures, China owns roughly $ 3.4 tn of US bonds.

Federal Reserve coordinates the issuance of bonds. Ben Bernanke is the chief of Fed. Janet Yellen will replace him next February.

By issuing bonds, the US government is essentially borrowing. But the lawmakers have set a cap on the amount the government can borrow. This is known as the debt ceiling. The current cap is at $ 16.69 tn Over the years the debt ceiling has been raised — over 70 times since 1962. But this time round the US congress has refused to budge.

The reason is political: Barack Obama, the president, is a Democrat but the Republicans led by Paul Ryan have a majority in the House of Representatives.

At the centre of this slugfest is a healthcare bill termed as Obamacare.

It basically wants to expand healthcare and improve quality. Republicans think that the scheme is too expensive and will add to the country's economic woes.

The US government has enough money in its kitty to last till October 17. After that it could be staring at default of payment. If that happens credit ratings agencies will downgrade US' credit ratings — and that will surely hit the business confidence; no investments, no jobs and a looming shadow of recession.

US' inability to repay its creditors will have a domino effect — banks and corporates will collapse across the globe. At the time of writing, Republicans have offered Obama a short-term debt limit increase to stave off default. 

Concept and Evolution of Mutual Funds in India

As the name suggests, a 'mutual fund' is an investment vehicle that allows several investors to pool their resources in order to purchase stocks, bonds and other securities.

These collective funds (referred to as Assets Under Management or AUM) are then invested by an expert fund manager appointed by a mutual fund company (called Asset Management Company or AMC).
he combined underlying holding of the fund is known as the 'portfolio', and each investor owns a portion of this portfolio in the form of units.

History

The mutual fund industry in India began in 1963 with the formation of the Unit Trust of India (UTI) as an initiative of the Government of India and the Reserve Bank of India. Much later, in 1987, SBI Mutual Fund became the first non-UTI mutual fund in India.

Subsequently, the year 1993 heralded a new era in the mutual fund industry. This was marked by the entry of private companies in the sector. After the Securities and Exchange Board of India (SEBI) Act was passed in 1992, the SEBI Mutual Fund Regulations came into being in 1996. Since then, the Mutual fund companies have continued to grow exponentially with foreign institutions setting shop in India, through joint ventures and acquisitions.
As the industry expanded, a non-profit organization, the Association of Mutual Funds in India (AMFI), was established on 1995. Its objective is to promote healthy and ethical marketing practices in the Indian mutual fund Industry. SEBI has made AMFI certification mandatory for all those engaged in selling or marketing mutual fund products.


Why should one invest in a mutual fund?

1. MFs are managed by professional fund managers, responsible for making wise investments according to market movements and trend analysis.
2. MFs allow you to invest your savings across a variety of securities and diversify your assets according to your objectives, and risk tolerance.
3. MFs provide investors the freedom to earn on their personal savings. Investments can be as less as Rs. 500.
4. MFs offer relatively high liquidity.
5. Certain mutual fund investments are tax efficient. For example, domestic equity mutual funds investors do not need to pay capital gains tax if they remain invested for a period of above 1 year.

How does one earn returns in a mutual funds?

After investing your money in a mutual fund, you can earn returns in two forms:

1. In the form of dividends declared by the scheme
2. Through capital appreciation - meaning an increase in the value of your investments.

How economic cycles influence returns ?

Indian investors need to stop leaning on structural factors to make gains,and instead,wake up to the reality of economic cycles,and the risks and returns that they entail,says Uma Shashikant.


Several investors worry whether the optimism of the 2003-7 period will return.The hope about emerging as the next big economic miracle has been replaced by despair.Everything that seemed to be a good thing feels like a burden now.Investors refuse to see some of the issues as cyclical and agree that a downturn will unleash the very factors that shall take the economy back to an up cycle.The reluctance to build economic cycles into an investment strategy comes from a dominance of structural factors that have influenced returns for a long time.
Economic cycles represent the correction of excesses that take place over periods of time.During an up cycle,there is an overall optimism.Capital is available to set up several new businesses as investors are confident about the future.Economic activity expands with assumptions about revenues,costs and profits riding on growing consumption and demand.Investment increases as revenues increase.Inevitably,these assumptions tend to be too sanguine to convert into reality over sustained,long periods.Unless unlimited capital is available at low costs and demand remains high even at higher prices,the up cycles cannot last forever.The up cycle collapses and businesses soon reach the bottom,trying to protect against failure,while cutting investment and costs,and looking for demand for their products and services.The cycle of boom turns to bust,then moves on to recession,followed by recovery,and back again.
The investors in emerging markets such as India take time to align their portfolio strategies with economic cycles.This is because a dominant number of structural factors influence their returns,sometimes overshadowing the logic of economic cycles.If someone were to tell Indian investors that real estate prices tend to move cyclically on the basis of the demand and interest rates,they would laugh it off.The real estate market in India is structurally insulated from the developments in the economy by a blanket of black money.It is a parallel asset market funded at high rates by cash,used dominantly by investors who want to acquire and hoard the asset.Several of these people are not impacted by the interest rates set by the RBI,the tax regime,the processes of the banking system,or the rules of law.When such an asset defies the laws of the economic cycle,it begins to attract ordinary investors,who see it as a safe haven during difficult times.The problem with this approach is that the simpler investors assume risks they are ignorant about and could be hurt if these risks manifest.The real estate market may not remain insulated completely if the money being invested here is sought for other purposes,or if the players have stretched themselves by overestimating the demand.The cyclical factors inevitably come into play,perhaps with a lag.Small investors in real estate hope for the structural inefficiencies in this market to continue forever,and that is the risk they take.
Leaning on structural factors does have its advantages.It is a tough,long road to correct structural imbalances and problems,and every policy correction offers investors the opportunity to make abnormal profits.Several investors in the Indian equity market have benefited from such structural changes.The first large set of retail investors in equity in the 1970s came from investing in the IPOs of multinationals.These were share sales by blue-chip companies,which were mandated to reduce the stake of foreign parents and offer shares to the Indian public at a price decided by a government agency.Subscriptions to these IPOs made several small investors very rich.This was a structural gain.What this triggered,however,was the tendency of
companies to go public too soon,making venture capitalists of the retail investor.There were windfall gains in some cases,but many other companies simply vanished.Even so,investors remain convinced that IPOs are a good way to make money.Their expectation from equity investing is skewed in favour of abnormal profits of a venture capitalist.What they fail to see is that they neither have the skills of an early investor,nor the ability to take on the risk of several failures and a few sparingly available successes.
Several equity investors base their investment thesis on structural factors.In the early days,they would bet on what the government would do in the budget.It was normal to dismantle some control or the other to alter the fortunes of few sectors in the 1980s and 1990s.Then came the structural advantages offered by a now open economy.There were technological advancements waiting to be deployed (banking ),markets that were unknown and untapped (mobile phones),productivity gains from scaling and modernisation (capital goods,auto).These structural gains were the themes of the winning investments in the post-liberalisation period.Add to it the consumer boom that was unleashed when incomes moved up,and aspirations of a young population skyrocketed.Investors in the equity markets in 2007 felt so confident about the structural advantages of India that the popular theory was that the country was decoupled and,therefore,would not be impacted by the developments in the rest of the world.
The past five years have grounded these risky and overtly optimistic views about investment returns.For the first time,a large number of investors is discovering that economic cycles dominate everything when it comes to returns from assets.It has been a tough lesson to learn.As most businesses remain grounded,investment and consumption are badly hit.The problem now is that making structural changes to the economic environment has become tougher than before.It is obvious to many that sustained economic well-being is possible only if we carry out structural reforms in several thingselectoral process,education system,infrastructure,governance,health and institutional structures.These alterations will take a painfully long time.
A shift is needed in the investor mindset.First,investing cannot always be about making opportunistic short-term gains.Economic cycles may dry out these tactics for too long.Second,return expectations should be realistic as windfalls cannot be a regular,sustained event.If some gains are made by sheer luck,it cannot be the basis for what might happen in the future.Third,the risk in investing needs to be acknowledged.Every awesome opportunity to make money has a hidden risk that needs to be dug out.It is time investors learnt to look out for economic cycles,instead of waiting for the next unexpected windfall.