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Beating the Pro

Dhirendra Kumar

The average investor almost always suffers from a false sense of inferiority that comes from playing against big investors and institutions. After all, the institutions are so big and get so much attention. How can the amateur stock picker fight this unequal war?

But that's really the truth. Its not the big investors the average investor has to compete against but the thundering herd. These institutional investors, including mutual fund managers, do most of the buying and selling, and on all key occasions think alike. A majority of this Thundering Herd could even be called the Blundering Herd. I can say that with confidence, having tracked most of the funds through the decade.

In my opinion, the fact that professionals now dominate the market has actually improved the amateur's chance! The average investor can take an independent view by buying overlooked stocks and especially the ones that the Herd has recently trampled. What holds investors back is the inferiority complex they've got from mistaking a cattle drive for sheer brilliance.

The inferiority complex causes investors to do one of the following three self-destructive things:

• Imitate the professional by buying "hot" stocks or trying to "catch the turn" in, say, Infosys.

• Become "sophisticated" by investing in something nobody knows about but sounds too good.

• Buy what they've heard a pro has recommended. Information on what the pros think is so easily available these days that the celebrity tip has replaced the old-fashioned tip from your close friend as the most compelling reason to invest in a company.

When you look at a stock story to check if it is as good on paper as it seems to be in real life, your complex prevents you from buying a stock in a company that has never been recommended by tip sheets. So instead of closely looking at the annual report of the company, you start looking at the expert's view on stocks. And you discover that the fund manager of the top-performing fund owns shares in Infosys, India's leading software company. You conclude that a famous fund manager knows a lot more than you and your Uncle put together. Indeed, the fund manager does know a lot more than you and everybody's Uncle put together! But that doesn't mean you're going to profit by betting on his tip regarding Infosys.

Since the fund manager doesn't give out his home phone number, you can't call him up to ask if he still likes Infosys. Nor can you check out whether he views the price drop as an opportunity to buy more. Or whether he has soured on the company and got out of the stock to cut his losses.

Most likely, the drop in the price will cause you to lose faith in the stock and without the star manager to reassure you, you will sell your shares to cut your own losses - maybe you've even sold them to the star manager! Then you take your diminished capital and repeat the process with another celebrity tip, this time perhaps an analyst at your brokerage firm. If you cut enough losses, sooner or later there's nothing left to cut.

Picking your own stocks in this popular fashion only confirms what you have always suspected. There is no way an amateur investor can compete with the professionals. If you're lucky enough to become totally demoralised before the money runs out, you'll send the remains to a mutual fund. My advice here is that if you want to bet on the pros, the way to do it is to invest in their funds to get the full benefit from their expertise.

Amateur stock pickers would have a much higher opinion of their abilities, as well as a greater net worth, if they avoided all expert buy recommendations in favour of their own research. This is the only kind of "independent investing" that makes sense. The investor's edge is something you already have. It is not something you acquire by listening to the latest tips from notable sources.

Actually, there are two kinds of investor's edges: the on-the-job edge, in which you have a working relationship with an industry and the related companies with whom you do business; and the consumer's edge with which you can capitalise on your experiences in neighbourhood shop, banks, airports and shopping malls.

Check out the leading stocks on the Bombay Stock Exchange like Hindustan Lever, Indian Oil, Colgate, Bata, Nestle, and NIIT. Most of these are right under the noses of millions of consumers who, if they'd paid attention to the popularity of these enterprises, could have profited from their edge. And they had plenty of time to do so: it often takes 10-15 years for a business to expand across the country with more and more investors becoming aware of it, before the Dalal Street professionals catch on.

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