June 15, 2008

What is hot today ?

I wrote about ‘rear view mirror investing’ in my previous post. What it essentially means is buying yesterday’s winners. As a far as long term investing is concerned, you will rarely make money buying yesterday’s winners. If like me, you believe that value investing is the way to go, then the focus has to be on companies and sectors which are currently out of fashion.

Lets try to invert – What is hot today. Let me think aloud and put a quick list below

Other Commodities like wheat, corn, metals etc
Energy companies (out of india ofcourse)
Real estate – In india it is a sure thing to make money and get rich :)

If you thought that this kind of investing was limited to investors, think again. Seasoned businessmen are prone to similar biases. Think telecom in US in 1998-2000 when companies invested huge sums of money in building capacity and then went bankrupt when the demand never materialized.

The same may be happening in real estate ..see this
article and this. Maybe this is just a blip. But when real estate price (per sqft) starts becoming costlier than US, singapore, UK etc there is something funny happening.

So why do most people do it ? two reasons i can think of

- social proof : if everyone else is doing and making money, it must be right and i must do it too.
- laziness : If you imitate others, you dont have to think and take responsibility for your own decisions

Like driving, if you invest looking into the rear view mirror, then be prepared to get hurt (hopefully not badly).

The above may work for traders, momentum players etc. That is however not my area of competence and so you have to evaluate the above statement in light of long term investing.


Anonymous said...

Good one Rohit.

As Charlie Munger says: "Invert, always invert".

Investing is more about understanding human (mis)behaviour, isn't it?

Rohit Chauhan said...

hi anonymous
true ..investing is more than 50% your and other's behaviour. as buffett has said several time, an IQ of 120 is more than enough. temprament is more important ..

in the long run if you can manage your emotions of greed and fear, i think returns will come out to be good


Anonymous said...

Good Post.

BTW, Why do you think real estate stocks are overvalued now? Most of them have fallen 50-60% from their highs and are available for 10 times PE.