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Are investors in for Phil Hughes experience?

Investors should be aware of risks associated with their investments. There is no point blaming external factors for the erosion in their portfolios.

December 22, 2014 / 04:06 PM IST

Amit TrivediKarmayog Knowledge Academy

The cricketing world was shocked by the Phil Hughes tragedy. A young, talented cricketer was hit by a bouncer on the head and died. Not just Australian cricket, but the shock travelled throughout the world. In the cricket test match being played between New Zealand and Pakistan, the New Zealand bowlers did not bowl a single bouncer throughout that match. The test matches between India and Australia were rescheduled.

Search started for that ultimate villain – some responded by asking for a ban on bouncers from cricket. Is that the solution?

What about the case of Raman Lamba, an Indian cricketer who was fielding at a close-in position when the ball hit him on the chest? This was a pull shot played by the batsman. Raman Lamba died.

In both the situations, i.e. Phil Hughes and Raman Lamba, the common thing was the cricket ball. Should we ban the ball, then? Or should we use a softer one like the tennis ball?

Oh, but then, how about the accident with Mark Boucher, who has dismissed more batsmen in test cricket than any other wicketkeeper in the history? He lost one eye while keeping wickets and it was not the ball but the bail from the stumps that hit his eye.Well, these are accidents. We need protection against such accidents, but focusing on the wrong cause would lead to the wrong solution. We often see such a behavior in the world of investing. Many times, investors and advisors alike, focus on finding the reason behind the price movements – especially when the movement is downside. Often, they end up with the wrong one.

In all market crashes, an attempt to find that one villain or that one trigger may be foolhardy. There are many factors working together that lead to a market rally or a market crash. There are many factors that impact the movement of stock prices in either direction. Some days back, one of the leading business dailies ran a headline “Markets crash due to fall in crude prices”. Some years back, the stories read, “Rise in crude prices is a risk for the markets”. I could not understand how the markets changed the preference.

While referring to investments in equity markets, someone opined that due to cases like Satyam Computers in 2008-09 that he stays away from stock markets. Well, this goes even further than what we have discussed so far. While cricket-lovers have only asked for banning bouncers, this gentleman would have asked for banning the game of cricket due to one incident.

Wearing a good helmet is a much better solution than banning the bouncer.

The problem with the Satyam Computers example is that one has picked up one company that went bust out of many companies that did not. The helmet (or protection) in this case would have been a well-diversified portfolio across companies, industries, asset categories and geographies. A faulty helmet in this case would have been a portfolio diversified across companies but loaded in favour of just one industry. We saw the death of many portfolios in the year 2000 – 01 when the technology company stocks went down. Many investors were wearing a faulty helmet – the diversification was only among technology companies. In the year 2008, we saw many portfolios losing value simply because they were loaded in favour of power or real estate sectors.

Understand the real problem before jumping to the solution.

The author runs Karmayog Knowledge Academy.

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