TRUST : THE FINAL WORD

Way back in 1990, when I was studying in Engineering College, the Harshad Mehta scam broke. It was chaos everywhere. The newspapers were filled with the details of this scam. No one ever imagined the catastrophic money involved. This was the only news being discussed everywhere. The scam had literally overtaken the lives of everyone. This was unprecedented. By that time I was not much aware of the stock market. This news made me curious and eventually, my journey into the stock market commenced. After I started earning, as a novice and greedy investor the first thing I did was to buy a hot tip stock. I bought it, got good returns, and sold it off. I became confident. I bought a few more hot stocks. It was a bull phase. The market was in full swing. Lucky that I was, this also worked in my favor. I made money. However, this was not to continue forever. The reality caught me off guard. I lost a few bucks on these cheap stocks. This was a big learning lesson for me. Years of experience and actual losses made me a bit wiser. I started reading about stock market investing. This reading about great investors like Benjamin Graham, Warren Buffet, Charlie Munger, Peter Lynch, and many others made me realize that investing in the stock market is not speculation but serious hard work. One needs to keep learning every day and understand the fundamentals of the companies very well. Creating wealth is not a cakewalk.

Armed with this knowledge, I started investing by following this new approach. This was way back in the year 2008. This time the approach was to invest in fundamentally strong companies and hold them for a longer duration. I learned the art of reading balance sheets and financial statements of companies. I prepared the checklist to select fundamentally strong stocks and invested in them according to chosen parameters. It was going very well. The portfolio started showing traction. Along with many other stocks in my portfolio, I had this particular stock as well. The fundamentals looked solid. The business was robust. The balance sheet was also quite clean. So, I picked up this stock. It ticked almost all the boxes. Everything was picture perfect. The stock price moved up. I was in a handsome profit. I was elated. Months passed by. But this happiness was not to last forever. Subsequently, the stock price started going down day by day. It has even gone down below my purchase price. I knew that sometimes stocks do exhibit crazy behavior and one must be willing to accept such notional losses. So I was holding with this loss and trying to find out the reason. Apparently, on the face of it, there was no change in the fundamentals of the company. However, within the inside quarters, something else was brewing silently.

On the fateful day of 07 Jan 2009, Ramalinga Raju, the Chairman of Satyam Computers, send shivers across the Indian stock market. He resigned confessing manipulation of company accounts. On that single day, the stock price crashed by about 80%. The stock which was trading at about Rs. 540/- in Jan 2008 spiralled to the lows of Rs.6. The stock crashed like a pack of cards. It was panic everywhere. The stock which was once looking picture-perfect a few months ago was lying in the dust, without any buyers. I was scratching my head. Where did I go wrong? Was the selection criteria incorrect? After analysis, I could figure out that at that point my definition of fundamentally strong companies was not full proof. The most essential parameter was missing from the list and that was “trust.”

From that day onwards, while selecting a company for investment, “Trust” is the first parameter I look out for. If I found anything fishy, I do not even bother to take a second look at that company. For me, trust is the foundation stone and the most vital aspect to deal with. I learned this lesson by losing hard-earned money. A stock market is a place where you learn only by paying this price. This is the hardest way to learn, and probably the only way.

Years passed by. The accounting standards and compliances have improved. The government, SEBI, and the exchanges have strengthened the monitoring regulations and guidelines. However, even after all these efforts, we have seen similar corporate governance issues with few listed companies. I am sure those who invest in the stock market must have burnt fingers in some of these fishy stocks like Yes Bank, PNB, PC Jewellers, Gitanjali Gems, DHFL, Videocon, Jet Airways, and so on. The list goes on. There are about 7000 companies listed on the Bombay Stock Exchange (BSE) and National Stock Exchange (NSE). Out of these 7000 listed companies, about 6750 companies i.e. more than 95% of the listed companies are in the small-cap world. And hence, this calls for extreme caution while selecting companies for long-term investments. You would be surprised to know that the balance sheets and financial statements of the listed companies also get fudged with the connivance of the owners, directors, and the CFO. This is the dirty game played by a few unethical goons at the cost of retail investors. While I write this, the NSE colocation scam is being investigated by CBI. If you are not careful and wise enough, this heat can easily engulf you. And you would be left running for the safe heavens. This is the ultimate truth and the only truth.

Trust. The most expensive word in our lives. The word which is engraved deeply in our hearts. Most of the time our lives revolve around this word. We are all social beings. We make friends, live in a close nit family, and build relationships. We often interact daily with many known and unknown persons. While dealing with them, intentionally or unintentionally we keep on making opinions about others. These opinions get imprinted in the brain. According to these perceived notions, we make decisions. The process of decision-making is very complex. However, over the years the human brain has evolved to such an extent that this process has more or less become instinctive and effortless. Still, many important decisions are always based on the word, trust. These are the decisions that ultimately change the course of life forever. These important decisions are termed “life decisions.”

You may have plenty of friends. But when you want to choose the best few ones for your lifetime, they will always be selected based on trust. The perfect selection of a life partner is a huge gamble. You never know how it might work out. That’s why they say, marriages are made in the heavens. This decision of choosing a life partner is again absolutely based on trust. In fact, every relationship is built on trust. During unfortunate circumstances when we need to visit a doctor, we always seek suggestions from our friends about his reputation and trustworthiness. When we have to purchase a house, we opt for a builder whom we can rely on. We never indulge in instinctive and impulsive behaviour while dealing with these essential situations.

However, unfortunately, when retail investors invest in the stock market, they do not seem to follow these metrics too seriously. Most of the time they invest based on either advice of friends or hot tips received on social media or the recommendations of the so- called TV experts or even just intuition. They blindly invest in any stock without even knowing the background of the company. They even do not bother to carry out basic inquiries or analysis which otherwise they were doing throughout their life.

It is surprising to know that when they go out to purchase vegetables of about Rs. 500/-, they will visit the same trusted lady sitting on the pavement and no one else. They have experienced that the lady is trustworthy and will never cheat them. However, when they invest lakhs of rupees in stock market, they do not show the same wisdom. They believe that the company they are investing in will automatically earn a good return. They are not even concerned about the trustworthiness of the owner and the company. This is the most common investing behaviour found among many retail investors.

With such investing attitude, the end result is going to be painful for sure. If one invests without carrying out a thorough analysis, then your entire capital can be completely wiped out. Hence, it is absolutely necessary to view every company with suspicion and then start your investigation. And mind you, if you haven’t yet burnt fingers doesn’t mean that your hands are safe. In reality, this means that you are just being lucky. The stock market monster is sitting right on your neck. Unfortunately, you are not able to see him because your eyes are blindfolded by your own fallacy. So, here I am again, with the cautious call to wake you up from the slumber !!!!

So, what does this mean for a retail investor? Should he invest in the stock market or stay away? How can he ensure that his investments are safe and secure?

The only answer to this question is “trust.” The safest and the wisest approach is to find a trustworthy mutual fund distributor whom you know personally and then empower him to create wealth for yourself. This will allow you to sleep peacefully while still being invested in the stock market. And believe me, this peaceful mind will make your life much happier than ever!!!!