The Simple Thinking

With the recent Citibank fraud hogging all the limelight it is worthwhile to think who is at fault. The advisor who duped ‘innocent’ clients or clients who believed in scheme which clearly looks to be a fraudulent scheme? The answer is both.

While one may argue that if an advisor comes with a letter supposedly issued by market regulator, there is no reason to disbelieve him/her. But where client erred is to think very obvious. The basic tenets of investing generally never changes.

Equity:

While stock markets can give high returns and long term average has been in the range of 15-18% pa, it is never linear. So it may give return of 40% in a particular year, the next year may follow with large negative returns. Anyone who promises even 15% returns every year irrespective of market condition, it calls for caution.

Debt:

Another scheme which unfortunately becoming popular is an FD with hefty interest in excess of 25% per Annumn. One has to remember that if someone is promising a return on debt instrument, it’s a liability for him. The person can service the debt only when it can generate returns higher than it has promised. Eg if a stock broker is promising 24% interest, he/she has to earn atleast 25% to service that loan. Now the obvious question should be how an advisor is making 25% on stocks when markets can be volatile and deliver negative returns. What has been observed is that it is mostly a form of Ponzi scheme where money is circulated and scheme runs only till the time new people and new money is coming in. Once that stops the entire structure collapses.

Emotions do come in play when we invest but remember there is no substitute to simple and logical thinking.

Happy new year and have a great year ahead!!