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Thursday, November 24, 2011

Do investors have the ‘if-its-free-I’ll-take-two’ syndrome?

Before I can answer the question, I need to tell the story about the syndrome.

A young boy was being taught by his father about prudence in handling money. Here are the three important guidelines provided by the father:

  • Live within your means and try to save money from whatever little you may have
  • Always ask the price of anything you wish to buy, and then decide if you can afford to buy it
  • Don’t blindly accept a quoted price; try to bargain and buy at a lower price

Well-versed in the guidelines, the young boy went to the local ‘paanwala’ to buy some candy. On being told that the candy cost a Rupee, he promptly started to bargain. Despite repeated pleas by the ‘paanwala’ that there was no discount on a candy costing a Rupee, the boy would not relent. A small crowd had gathered on hearing the commotion, and potential customers were walking away. In desperation, the ‘paanwala’ handed over a candy to the boy, saying: “Take this. It’s free. Now please leave.” The boy was delighted, but refused to budge. “It’s free? Then I’ll take two!”

That boy must have grown up to be a stock investor. He also must have told all his friends – who also became stock investors. How do I know this? Because of the proliferation of web sites offering “sure-shot free stock tips” and “99.9% success guaranteed Nifty tips”.

There was a time when I used to go out of my way to provide free advice to young investors about what stocks to pick and how to build a portfolio. But I no longer give free advice – except in my blog posts. Why? Because I found out that most investors were not following my advice at all. In fact, they were doing just the opposite. They would not buy the stocks I’d recommend, and would go right ahead and buy the stocks I suggested that they avoid!

Then a wise reader related the story of a doctor in a small town who decided to treat patients for free after his retirement. Hardly any one showed up at his chamber. Then he decided to charge a reasonable fee. Soon, he had several patients visiting his chamber every day. The moral of the story is: No one respects free advice.

The other day, I received an email: “Can you please suggest one multibagger stock?” Usually, I ignore such emails, or answer back: “I don’t provide free stock advice.” But I was in a genial mood that day, and wrote back: “Buy Tata Steel.” The response floored me completely. Let alone thank me, this smart fellow came back with: “Any penny-stock multibagger?” This is what I meant by ‘if-it-is-free-I’ll-take-two’ syndrome!

A more dangerous affliction is the ‘if-it-is-free-I’ll-take-as many-as-possible’ syndrome. I got this email from such an investor: “I would like to buy some fundamentally strong stocks in this bear market. Please send me a list of such stocks.” I answered: “I don’t give individual stock advice for free. But you can take a look at some of the beaten down stocks in the Sensex and Nifty indices.”  Back came a response: “OK, I promise to send your fee, but send me the list of stocks now.” I didn’t bother to reply, only to receive this reminder: “I still haven’t received the list of stocks.” Later, I found out that this freeloader was regularly providing free stock tips in one of the investor forums!

The answer to the original question is: Many investors do. I think it is part of the human psyche that we get swayed by products that are offered ‘free’. That is why retailers periodically offer “Buy-1-get-1-free” deals to get rid of unsold or unfashionable or oversized/undersized stock. Shops tend to be overcrowded during such offers.

When it comes to stock advice, ‘free’ usually means ‘not good’. Investors need to appreciate that. If some one really knew which stocks will become multibaggers in future, he would not tell a soul and buy as many of those stocks he could afford before the stock market got wind of it. 


Jasi said...

A brutally honest post and I admire your guts to do so. Normally you'd find gurus and pandits shy away from the question of why arent your services free.

My two cents.
1) Now, even though I do it myself, but in the stock market if you are relying on others, free or paid, you are headed for uncertain times. Let me not call it a disaster. The main point is, whoever is assisting you isnt going to be there for you forever, any fees notwithstanding. Investing however, for you is a long term game. So the best way forward is to take your own decisions and keep empowering yourself with information. Sooner or later, one would learn from mistakes. And every bad experience will make you better.
2) "If some one really knew which stocks will become multibaggers in future, he would not tell a soul and buy as many of those stocks he could afford before the stock market got wind of it. " - Guess what, this is exactly what I used to think of these numerous guys who parrot multibaggers on TV. I mean if you know it, why don't you go buy truckloads and keep quiet. After all if everyone knows it and buys it, it is bound to underperform.

Thanks so much! Your blog is indeed a fresh whiff of air.

Ninad said...

Some more words of wisdom from a man with a few grey hair. Another brilliant post! Your blog has taught a young investor (ok I am closing in on 30's soon :P) to be patient with the market. Keep it coming. Thanks again!

Prem Lulla said...

I have been reading your blog since more than three years now. I am also a Investment Advisor and Stock Sub-broker and I always appreciate your views.

I look forward to your posts as you give us a good perspective for an investor.

I agree with you that Free Advice is availble a plenty and I should create my identity as a valued professional by not giving free advice.

Subhankar said...

@Jasi: Thanks for your comments. I have always been candid, and like to call a spade a spade. That may not be politically correct some times.

One has to take responsibility for one's actions - whether it is eating or drinking too much, or investing on a hunch. If making money was as easy as opening a demat account, no one will need to go to college or university any more!

@Ninad: Appreciate your comments.

I have a head full of gray hair - but that is more because of hereditary reasons, less due to wisdom.

Ambition and aggressive action work well in the corporate world or in business. Patience is more useful in stock investing. The ability to refuse Mr Market's attractive offerings and wait for an even better deal is the trait of a successful long-term investor.

@PL: Your kind words are accepted with humility - specially because they come from a professional.

The fact that you still find my blog posts useful after three years is great motivation for me to continue writing. Thanks.


I have started following your blog during 2008 and till now I am reading each and every article with great interest. Keep guiding the investor community.

Subhankar said...

Wow, Chintan! You must be blessed with a lot of patience and forbearance to read my posts for 3 years - because I tend to harp on the same things over and over again.

You were also one of the first subscribers to my Monthly Newsletter - one of the few to have paid 'gurudakshina' (if you will permit me to use the term).

As long as there are readers like you, I will remain motivated to keep writing. Thanks.