Sensex and the art of getting it wrong

Last Updated: Tue, Dec 25, 2012 04:53 hrs

Last Christmas, the Sensex was at 15,738. A few days before they left for their year-end break, analysts at CLSA had predicted the index would touch 17,000 by end of 2012, a measly gain of over 1,200 points or eight per cent over the year. Cut the transaction costs, brokerage and other costs, even savings bank interest rates appeared to be better. In January, Deutsche expected the Indian bellwether to be 18,000. At a Citi India investor conference in May, when the index was around 16,100-mark, the bank's analysts expected the index to be around 18,200, a gain of 13 per cent by the year-end. All these targets were widely reported.

Sadly, closing on Christmas Eve suggests that these analysts have all got it hopelessly wrong. Worse, their targets have been misleading. Christmas to Christmas, the index has given a whopping 23.5 per cent, almost thrice as our first analyst had predicted. Now, this is not a case of a minor error in judgement. It was an absolutely wrong and misleading call. At 23.5 per cent, equities have beaten fixed deposits, money market schemes and every other paper investment available for the Indian investor, even before taxes. Who is answerable for these misleading calls? Aren't these analysts taking millions of investors' money home in fat packages and bonuses supposed to be apologising for the blunders they made?

Oh, we are sure that they had made themselves immune by putting out those disclaimers in those micro-fonts at unreadable corners in those research reports. So, what? Should we let them get away?

If this is the level of understanding of equities at the apex level of your research firm/brokerage, imagine what would be the understanding of the foot soldier who is coming to sell you the stock or making that call to you on phone? Chances are high that he knows less than you and is just bluffing his way into your wallet. Be scared. Be very scared.

Equity sellers often get away by not giving clear targets for the short term, calling the entire asset class long-term. This is a big bull. I would never buy it. Equity is one of the most dynamic asset classes and needs constant attention and frequent adjustments, more so in these days of hyper-information flow.

Investors who are getting into new advisory or brokerage relationships with brokers or advisories should demand clauses in the agreement that penalise brokers for such misleading calls. There should be provisions in the agreement, which provide for frequent rebalancing of the portfolio in tune with the changing market environment. Recently, a fund manager explained how advisors in Boston, US lost their licences for not rebalancing their clients' portfolio in time to avert losses.

The Street, like many of our British legacy institutions such as bureaucracy, police and transport services, has been self-serving and has often looked down upon the consumer. Though a lot has changed in terms of clothes, systems and language, the lay investor often remains susceptible to abuse. Let us hope it changes before there is an India Gate on Dalal Street.

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