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Beware of 'Professional' Advice

Most of us would think that taking advice from investment professionals like brokers & advisors would be a good idea. We would be right in seeking advice, but wrong in blindly following it

The man talking to me considered himself a seasoned stock investor. Yet, he was puzzled why all the stocks he had invested in were down to less than half the price he had bought them at. He wanted some 'feedback' on why this had happened. Normally, I try and wriggle out of these situations but this was a cousin's wedding and he was a fellow guest so more for social reasons than anything else, I asked him which companies he had invested in. He reeled off a dozen or so names and I was in for a shock. There wasn't a single recognisable name. Like any other investment analyst or business mediaperson, I have a passing acquaintance with a few hundred companies, or at least have heard their names. And yet, every single one of the names was a complete unknown.

On the face of it, I had no right to be surprised since there are a few thousand listed companies in this country. However, it is a fact the vast majority of them are utter duds as investments and no one looks at them seriously. Well, I'd always assumed that there were investors who got stuck with one or two such companies but there couldn't possibly be anyone who would go about building a portfolio exclusively out of just duds. Or so I'd thought. However, it goes without saying that the culprit was not my friend-this portfolio wasn't a result of his own research. Each one of these stocks was recommended to him by a broker with an accompanying story on how it was a great investment.

However, my exciting time at this wedding wasn't yet over. I next ran into someone who was doing something similar with mutual funds. This gentleman had one of the largest and most directionless collection of mutual funds that I'd ever seen. Basically, practically every single equity fund that anyone had ever heard of was there in a tiny percentage. And was this portfolio a result of the investors' own initiative? Absolutely not. It was entirely guided by the advice of a professional 'advisor', whose advice was always to sell whatever fund can be sold and buy the latest one that's being sold.

What I found particularly galling was that in each case, the questions that the investor was asking about their investments were the right sort. Both men had the instinct for trying to figure out what was wrong with their investments and for trying to do things right. However, both had been actively and deliberately misled by people who were in the profession of providing investment services. I don't know whether this is relevant or not, but all this took place in Delhi or Bombay but in Jamshedpur. Now, Jamshedpur is hardly a hick place and on a drive across town one sees signboards of all the major banks, 'new-age' brokers and mutual funds. Maybe there was a connection, who knows. Maybe investors in Mumbai and Delhi had more channels to seek out second opinions. Or maybe not.

Anyhow, as the evening wore on, news came of the next day, a bandh had been called by Maoist to protest against rising prices. We were told that things could easily get violent and plans were made to send off the bride as well as all out-of-town guests before daybreak. Soon, thoughts of badly planned investment portfolios were far from everyone's minds.