Stocks Detox

Publication: The Times Of India Mumbai; Date: Sep 18, 2007; Section: Your Money; Page: 42
Or, how an addiction to stocks cost over a crore, and how it was fixed
It  was 10:30 on a sultry May morning in 2006. Businessman Ashutosh Agarwal was watching the stock ticker on a business news channel with a growing queasiness in his gut. He was sweating profusely. The market had just plummeted 700 points. He was up to the ears in risk. He had taken on more than he could afford, because the market was soaring a few months ago, and makign a quick buck had never seemed so easy. If only things had stayed that way.
Ashutosh, despite his roaring technology business, was eager to make money on stocks. Many of us are, and there’s nothing inherently wrong in it. But for Ashutosh, it was nothing short of an addiction: he didn’t just invest, but also watched market movements obsessively every hour. Every day, when the stock markets closed, he would switch to tracking the commodity markets into the late hours.

This had taken a toll on his primary business and his health, but, like a true addict, he seemed oblivious his problem. By the time I first met him, soon after that fateful May day, he had managed to bring down his portfolio alarmingly, from Rs 4 crore to Rs. 2.6 crore. Irrationally, if somewhat understandably, Ashutosh, who was willing to invest when index was at 12,600, was now hesitant to do so at 8,900. I sensed emotional and behavioural biases. So we ran through a detailed discovery process, during which we discussed his attitudes towards money, what was really important to him, and why he was doing something for which he had already hired four brokers and two agents.

Reasonable goals

When Ashutosh described his financial goals, they turned out to be surprisingly reasonable for a man of his means. He wanted to ensure his investments would grow at the rate of 20-30%, with an eye on downside risk. He wanted to ensure a post-tax retirement income of Rs 2 lakh per month in today’s rupees, starting 2008. His expectations were not outrageous, as he already had a substantial income from real estate. And he wanted to give an apartment that would cost him Rs 90 lakh as a gift to his daughter Neeta. I was baffled. Considering his goals were pretty balanced and moderate, why had he felt the need to go to multiple brokers, and to monitor his stocks on an hourly basis? He said, “I was trying to derisk my portfolio.”

I pointed out to him that having multiple brokers, none of whom knew what the others were doing, would actually increase the risk to his portfolio and was therefore dangerous. Watching stock prices every hour would not help reduce risk, either. Risk management comes from having a sound investment policy, one that is co-ordinated and that takes into account all aspects of asset allocation, sectoral allocation and investment selection.

Unreasonable risk

A detailed assessment of the Agarwals’ current cash flow, net worth statements, insurance policies, investments, and tax returns revealed much useful information. Ashutosh’s equity portfolio, consisting of stocks, portfolio management schemes (PMS), and mutual funds, was down from Rs 4 crore to Rs 2.6 crore. Largely responsible for this was Ashutosh’s high exposure to futures and options (F&O). He didn’t realise it then, but now he is in no doubt that F&O can magnify your gains—and losses.

But I still wasn’t sure whether Ashutosh was really clear about where he really slipped up. He had exposure in 125 stocks and futures. This was in addition to a PMS (with another 30 stocks!), and 19 mutual fund schemes. A threeyear bull run had lulled Ashutosh into the belief that that he could easily make 20-30% in equities, and that there was no real downside risk. He also came to think that earning 25% in equity mutual funds was a cakewalk: he had previously got returns as high as 40%, so even if he lowered his expectations, a 25 % return was not too much to expect, was it? Many of his peers seemed to concur with him. But what Ashutosh really neglected to understand was that risk was a constant possibility, which needed to be addressed. Just watching the news constantly while you are financially overextended does not address risk.

Making matters worse …

Ashutosh had compounded his error by investing heavily in penny stocks, many highly illiquid. His portfolio was skewed toward mid- and small-caps. He would buy some stock recommended by an analyst on TV, and make a small profit. Encouraged by this, he would buy another stock, and again make a bit of money, feeling chuffed about his repeated success. The cumulative effect of this addictive little game was high exposure to such picks. When the market tanked, these holdings, along with his F&O exposure, led to an erosion of almost 45% of his portfolio, with some stocks down almost 65-70%.

He had five unit-linked insurance plans, which he certainly did not need at his age. But when the very self-confidence that brought you success turns into overconfidence, it often marks the beginning of a downward spiral, both in investments and in life. He had all the best-selling plans, but none of them actually suited his requirements. Indeed, our analysis indicated that he did not need any insurance at all.

Opportunity knocks…and leaves

I pointed out to Ashutosh that he had gained little by getting in and out of stocks in very short periods of time, often just a few days. That was perhaps the result of obsessively monitoring prices. I said, “Your portfolio suffered more than most, and my sense is that you are now also about to miss the rally, because everyone on TV is bearish, and you seem bearish, too. It’s very unlikely that you would invest when your brokers are bearish. Don’t make the mistake of re-entering only after the markets have rallied and crossed the previous high.”

We then created a comprehensive investment policy (as distinct from a comprehensive financial plan) for him. This document defined realistic expectations, and laid down precise rules on what to buy or sell, and when. We determined in advance how Ashutosh should respond if the market were to drop by 10%, 25%, and 40%. More importantly, we defined the kinds of products to buy, and how each would be evaluated to see whether it complemented or fit into the portfolio. Some details are below.

The rehab programme

Ashutosh’s portfolio leaned heavily on equity (55%) and real estate (34%). He was underweight on debt, and it was important to remedy that immediately, since he would need income from his portfolio. Currently, debt accounted for 8% of it, and cash, 3%. We pruned Rs 40 lakh worth of dud stocks, and parked half the proceeds in balanced funds. The rest went to large-cap stocks. We scaled up his debt component by dipping into the savings account and his monthly cash inflow, to create a ladder of bonds. We used fixed maturity plans and the Public Provident Fund to scale up the debt component. Both would give better post-tax returns than RBI Bonds, and the tenure was shorter.

We stopped some insurance policies for which Ashutosh had paid up three years’ premiums, and created an opportunistic investment account. This account was used in June and July 2006 to buy several large- and mid-cap stocks, and to buy diversified equity funds.

We trimmed Ashutosh’s mutual fund schemes from 19 to around 10, and stocks to around 18. Getting the stocks down was a challenging exercise, but we set strong filters and created a portfolio of growthoriented stocks. Ashutosh’s PMS portfolio

was very much like a mutual fund portfolio. The frequent churning increased costs and taxes. We got rid of the entire thing, and made a list of common investor mistakes that Ashutosh should guard against.

A year later, Ashutosh seems much happier and more relaxed. His stocks and mutual funds have done extremely well. His portfolio is reviewed at regular intervals, and it has become clear that, without taking undue risks, it is delivering more. Ashutosh still needs to check stock prices every day. Considering he used to check them every hour, that is big progress.


Ashutosh Agarwal, in his late 50s, has a technology business. His wife Laxmi is a homemaker. Their daughter Neeta, a chartered accountant, lives with her husband. Ashutosh and Laxmi have a gracious home in mid-town Mumbai. They enjoy art, and taking vacations. Their strong sense of social responsibility is reflected in the charitable contributions they make. Amar Pandit is a Certified Financial Planner and Director, My Financial Advisor

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