`Be rational about investing' -- Mr Parag Parikh, Parag Parikh Financial Advisory Services, Mumbai

Rasheeda Bhagat

EQUITY investors need to get rational about their investment decisions, refrain from trading and stop watching equity prices daily. If they can buy and hold, it is doubtful they will lose money, says Mr Parag parikh, Chairman of the Mumbai-based Parag Parikh Financial Advisory Services, in an interview to Business Line.

If they can adhere to these golden rules, this is the best time to invest in equity as many shares of good companies are going cheap...provided you have ``nerves of steel,'' he says.

Excerpts from the interview:

Most investment advisers caution equity investors to have a reasonably long-term horizon. But do you think in recent times investors have shown patience?

In the last 5-10 years, with the equity market booming in the US, then the tech boom...with the Internet and the dotcoms... there has been a paradigm shift in the way we look at business. These days, investment is not being looked upon as something that can take care of our future, but as a trading instrument...

To make quick money!

...Yes, and with day-trading coming in, it has become very easy for everyone to get into the stock market. Now, who is a day-trader? Someone looking at, and trading, in stocks full time. Though he is in the capital market, he cannot be called an `investor'. Most of them are just gamblers.

In the last five years, two different shifts have taken place. With globalisation, funds go from one to another country. For this movement to go on, the stock market is the only barometer.

And when they started moving to and fro... every government started giving more and more importance to the stock market.

But do you really believe the equity market is the barometer of the economy?

No, today, it is a barometer or how the funds are flowing in and out; it is no longer the barometer of the state of the economy. It is a barometer of the herd mentality of the fund managers.

That is an interesting way of putting it!

Fund managers are just people like you and me, only their level of arrogance has increased because they are sitting on a lot of money! The same thing could happen to us too, if we were sitting on that kind of money.

And because of globalisation, fund movements are rapid...they were responsible for destabilising the South-East Asian economies because they exited suddenly from those countries.

Do you think that can happen to India?

Yes, it can. Why not?

Do you see any such signals?

Well, Enron is one thing... ?if we are going to behave with the Enrons like this?... the disinvestment process in Air India was delayed for such a long time that SIA went off. Now I doubt if any other airline will come forward, given the present condition of the industry. As a country, what we really need is foreign direct Investment (FDI); we do not require foreign portfolio investment.

We have to make the rules of the game in India so good that FDI comes in. But we are doing nothing like that.

Next, we have to abandon what does not work. Now there is no point in calling the PSUs as our jewels and such things.

So, you are saying we have to divest. CMC and HTL deals have gone through.

But what is it...how much? The government has to get out of every such business.

These are uncertain and volatile times. What is your advice to small investors? What should they be doing.

When we talk of small investors and read about how they put their life savings into the equity market, we have to ask: Are they really being rational about their investments? They also get into this trading mentality, and that is where they lose their money. I doubt that someone who has invested and is willing to wait for some time, can lose money.

So, trading is a strict no-no for small investors?

For anybody. Just look at how much wealth was lost...It was because of trading and the rush into the IT sector...thinking they will make huge profits. I am a BSE broker, but you do not see any terminal on my table, because I do not need it. If I am to advise my clients, I do not need to see the rates everyday. We are in the business of advising people on good investment opportunities.

Do you think a majority of brokers is interested in giving their clients `quality advice'? Brokers across the board cut brokerage rates to encourage trading, so that their commission went up.

I agree, but I can also tell you, at least we have not followed that policy.

So, you have not cut your brokerage rates?

To be honest, we too went with the times. But when everybody was expanding by giving terminals outside, we never did that. Second, when everyone was encouraging speculation, that was never encouraged in my office, irrespective of whether it gave us money or not.

So, you do not encourage investors to buy today and sell tomorrow?

No, we do not take such clients; not at all.

And you do not mind losing out on business on that score?

First, let us define what business is. It is not something that brings money everyday. My idea of business is to ask how many customers will cling to me over a period of time, say, 50 years.

For that, their money has to last that long!

Yes. Second, what is my job? My job is to give the investor the right advice. And when I ask myself that by allowing them to speculate am I giving them the right advice, my conscience give me the right answer. That is all.

What percentage of clients want advice; and what percentage just call and say, buy this or that?

Today, we have been able to get the right kind of clients; in spite of bad times, we have survived.

What are you advising your clients these days?

We say, `you require nerves of steel to get into the equity market. Because markets are down and out. You have to buy when others are selling. At this stage, we are not telling our clients to get scared and go into the debt market, the way others are doing. It is only during such uncertain times that you get good value. So, buy cheap and hold for long. We have been successful in equity because we have been conservative. In finance, you have to be conservative.

Whether they listen to my advice or not is another thing, but it is my job to give them the right advice. We are also careful about choosing our clients.

Are you necessarily going in for high net worth individuals?

In our office, every client is as precious as ever.

For those with `nerves of steel', what sectors are you recommending?

Pharma and FMCG, because there are very good values there.

Not technology?

No, we do not like technology. During those times too, we never told our clients to buy into technology. Maybe you will say, we missed the bus, but we cannot get all the buses. Because we did not understand those businesses. And if I do not understand it, I have no reason to tell my clients to invest in it. My competitors will argue that if you do not understand a business, it is your job to learn it. But I doubt if even Bill Gates understands his business...It is changing so fast.

But there must have been people who bought technology shares, going against your advice?

Yes, and lost a lot of money too.

I see in your room a certificate from Harvard for behavioural finance. Can you explain that a little?

Behavioural finance is the in-thing now. What are equity markets and why are they so difficult to understand? Because until now, the stock market only talked about numbers and we did not take into consideration how human beings behave. We, as human beings, are emotional, and sometimes, we make emotional and not rational, decisions. And that is what makes the stock market very interesting!

Many investors who get into the stock market are greedy and ultimately, get cheated. If I cheat you, it is your fault too, because it is your greed I am exploiting.

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