Ok…before you close this tab, this isn’t another of those passive is the panacea for all investing ills post. My reasons for writing this are a little different.
Last week a friend of my dad told that he was opening a demat account with Kotak and asked me if buying penny stocks and forgetting about them would be a good idea. I asked him why did he want to do this? He said that he had heard some examples from a friend of X company being worth Rs X if bought in X year.
I was just dumbfounded and it took me a while to collect myself and respond to this brilliant investment thesis. I told him opinions are free and that he’d be better off investing in a mutual fund. What I really wanted say was this quote
“Opinions are like assholes, everyone has one but they think each stink.”
― Simone Elkeles
Buy hey…dreams right? Anyway, I think the better advice would have been to recommend index funds. Look…I do realize that offering financial advice without knowing anything about a person’s life is a cardinal sin but just bear with me for argument’s sake.
Stock picking is hard…period. This isn’t some grand revelation and yet the lure of a quick buck is hard to resist for people. On top of that, we have a new breed of genius stock gurus, chartists, gurus with WhatsApp, Telegram groups and Twitter followings dedicated to spreading their horse shit and people fall for it. This means that there s is a steady supply of lambs for the slaughterhouse and slaughtered they are.
Unless you are gifted enough to pick stocks, which trust me, you aren’t, you are better of buying the market and logging into your Netflix account, picking some movies and TV shows to binge and chill.
In the past year or, we have seen a number of stocks collapse on the back of corporate governance issues, shady business practices, outright thievery. These gems have fallen anywhere from 20% to 100% in the past year or so. Here are some stocks in all their visual glory:
Okay…let me wrap this up. This whole post this post by R Balakrishnan titled “In praise of passive investing” and it just instantly made sense. Bala has succinctly made a case for index investing. Common investors who don’t have the skill to invest in equities directly can do far worse than an index fund. Cough ULIP .
The right advice in my situation would have been to tell my dad’s friend to consult a SEBI registered financial advisor. But the chances of that were almost ZERO. Because there is a lot of effort involved there. Conversely, my chances of actually getting him to invest in an index fund vs a bucket of penny stocks were way higher.
So, I think, you can certainly give worse advice to strangers than asking them to invest in low-cost index funds. Afterall, look at the blue line of Nifty vs the other scammy stocks, although it is an unfair comparison, I’m pretty sure, investors in these stocks would pick the horizontal blue lines vs their suicidal lines.