Keeping your head when others are losing theirs

Pointing to gold, the only important exception to the intrinsic-value rule is a very weak justification for arguing that Bitcoin will retain its value

We will most likely remember 2021 as the year in which a lot of people lost their heads. It is impossible to forecast how long it will take the mob to regain its sanity. These are the top four ways in which the mob lost its head in 2021.

Bitcoin mania

Bitcoin does not have any intrinsic value. The only argument that Bitcoin fans have is that gold, too, has very little intrinsic value. Firstly, it is absurd for several large cryptocurrencies to claim that they alone are the new form of gold. Second, pointing to gold, which is the only important exception to the intrinsic-value rule, is a very weak justification for arguing that Bitcoin will retain its value. Thirdly, it is because gold has almost zero intrinsic value that it is so volatile. In dollar terms, gold lost 83 per cent of its purchasing power between 1980 and 2001 and is yet to reach its inflation-adjusted price from early 1980, that is, 42 years later. Finally, independent of the value of Bitcoin, crypto exchanges in many countries have disappeared, taking with them the Bitcoins of retail investors.

Buying baskets of stocks

As I have written previously also in this paper, the S&P Indices Versus Active (SPIVA) Funds India report shows that the average active mutual fund manager is unable to outperform the index. Hence, there is no reason to believe that the average basket of stocks offered by Sebi-registered investment advisers, research analysts, or portfolio management service managers will be able to outperform the index. Further, the annual fee on some of these baskets of stocks is more than 40 per cent of the amount invested. Finally, investors are only shown the successful strategies of these advisers, which deliberately creates a perception that all their strategies have been successful.  
 

Individuals investing in an IPO

Individuals investing in an initial public offering (IPO) is far riskier than investing in individual listed stocks. Firstly, individuals (including high networth individuals) will get a high allocation in over-priced IPOs and a minuscule allocation in fairly priced ones. Secondly, promoters of companies that have a major hidden problem (or several problems) may like to sell most of their shares during the IPO, even if it is at a lower price. However, regulations do not allow them to do so. Preventing willing sellers from selling their shares artificially pushes up the price of the shares in an IPO. Hence, the pricing in IPOs is not reliable.

Finally, mutual funds do not pay (short-term) capital gains tax, so it is simpler for mutual fund managers to exit before the lock-in ends for venture capital/private equity investors and employees. This puts individual investors, who have to worry about the tax incidence, at a significant disadvantage while investing in an IPO.

Following influencers

Influencers are enabling the three manias mentioned earlier. Most are paid by companies to promote these products. But they don’t disclose this payment to their victims. Unfortunately, a large number of people have been following their conflicted advice.

It is extremely difficult to stay rational when everyone around you is losing their head, and getting rich without deserving it. But as one of the world’s wisest investors, Charlie Munger said, the only way to be a good investor is to be rational. And as Rudyard Kipling wrote, addressing his son: “If you can keep your head when all about you are losing theirs… you’ll be a man, my son.”

The writer is an hourly-fee financial planner and Sebi RIA at Fiduciaries.in. He was a private-equity investor for 12 years