Whenever there is confusion and no definite answers are available to most questions in my mind it’s a tussle of acting with knowledge v/s information. The confusion stems from the fact that people tend to act on information more and generally without application of knowledge. Further I am not talking of complex things like PE, forward PE, BV, EV etc. I am talking about simple and basic things happening in a country which affect investments and thereby the overall value of your assets. These things are very obvious yet very little understood.

There are a lot of subjects to talk about and I am highlighting 4 examples which I believe are quite pertinent right now.

Let’s talk about interest rates and to be more specific short term interest rates. The equation is quite simple to understand. If the rates go up the markets go down and vice versa. That is all that there is. Basically the government raises interest rates as to regulate the economy – this is generally complex to understand. Lets us look at the simpler side, which is that people are generally risk or loss averse and tend to prefer security in their earnings. So if interest rates go higher the money moves to safer and more secured havens. Money tends to move to where it is treated best. Unfortunately for us institutional money moves at a pace which retail investors cannot match. Hence before retail investors act they have already accumulated reds in their portfolio. Now what should we do to act knowledgeably? For us if the rates are rising and stock prices are falling we must know that the reverse will also happen in due course. Rising interest rates does not mean that you let loose and start selling but you perhaps start selective buying. The effect of rising rate can be very severe and it is only prudent not to be too aggressive in such times.

The second thing that most people do is to make decisions based on the index levels which do not make sense. Why? Very simple … The index – whichever you choose SENSEX, NIFTY etc are generally a very poor measure of the overall health of the market. They are representative of only a few stocks and are subject to movement in a few stocks. If you really wish to study the trend perhaps you should be looking at the advance / declines ratios for many days, perhaps months and make analysis based on that. That will give you a broad level insight into the real health of the market. What must be understood is that companies are a going concern and just because index is down does not mean that the company will shut down and that businesses will not grow. A well managed company will continue to make strategies to tide over differing demands based on their product/service life cycle.

The third area I wish to comment is on price. A Rs. 30 stock is not necessarily cheaper than Rs. 300 stock. Real value of a stock does not depend on the market price. It depends on the earnings capability of the company. In the short term it is driven by emotions but in the long run it is earnings that dictate the gains that you will make as a shareholder. On a similar note a Rs. 10 NAV does not mean that a new fund offering is cheaper than existing ones. So even if you invested into a Rs. 200 NAV fund in both cases your fresh money will enter the market at almost the same time. In all probability if the fund NAV is Rs. 200 or so look at when it started or what was the inception date. This will reflect the manner and consistency with which the fund has been managed over years. That would be a more knowledgeable and prudent decision to make.

Lastly I want to comment on dividends. Dividend from shares and mutual funds are quite different. Dividends from shares are reflective of a company that is profitable and is keen to add to shareholder wealth. This is healthy and welcome and the more the better it is. On the other hand investment into a mutual fund based on information of dividend declaration is quite a ridiculous decision. In this case it is your own money coming back to you and the market value of your investment is then the difference between what you invested and the dividend you got back. You have done a couple of transactions instead of one with no particular benefit as such. Even to have this money treated as tax free income you have to hold your investment for many months. What if in this time the fund underperforms or does not perform in line with peers. You have also made an opportunity loss in this case.

In times that we live information flows in ample whereas knowledge is really sparse. It is unfortunately only available by doing all the hard work yourself. I know it is a challenge to decide whether what you are acting upon is mere information or real knowledge.