In a famous movie scene, one character explains to the other how their company makes money selling stocks.
He explains: keep recommending stocks to the customers so as to earn commissions continually - without caring if the stocks are good for the customers.
The movie: ‘The Wolf of Wall Street. In the years this movie is based, this was common practice.
This attitude led to advisors losing their reputation in that era.
Many advisors genuinely worked for the good of their clients. But as they say, ‘it only takes a few bad apples to spoil the barrel’.
Today, we don’t hear much about people investing in stocks based on the recommendations of salespersons.
People were particularly upset - the relationship between an investor and an advisor was supposedly based on trust.
If an organization puts out a list of stocks to buy, few people would buy.
If someone you know and trust tells you to buy a stock, you’re more likely to buy it.
People trust people - individuals with a face and a voice - far more than they trust faceless organizations.
Organizations can change. The people running them can change. But people don’t change much.
Personal reputation is more long-lasting.
This is why companies hire famous personalities to represent their brand.
Amitabh Bachchan - ICICI Prudential Life, Amir Khan - Samsung, MS Dhoni - Mastercard India: some examples.
In the last 10 years, there’s been a new kind of star.
The influencer.
The internet has allowed people from diverse backgrounds to become trustworthy faces.
Earlier, faces were mostly film or sports stars.
Now, people with very specific interests and audiences have emerged.
Fashion influencers, travel influencers, fitness influencers, and thousands of other category-specific influencers.
They usually have fewer fans compared to movie or sports stars.
Because of their domain-focused nature, their audience is incredibly loyal and trusts them.
Many brands now choose to partner with YouTube and Instagram stars instead of movie and sports stars.
It works. The trust is higher. So, the sales are higher.
There’s another high-trust category of influencers: personal finance influencers.
They appeal to curious people wanting to learn about personal finance and investing.
Knowledge is being spread. Great.
Some of them are giving investment advice.
Unfortunately, a lot of this advice is not correct.
Some ask their followers to invest in certain stocks, mutual funds, or other assets despite not being very knowledgeable.
Some big names that you’d think are reliable have been giving out incorrect advice.
Even if the advice might be correct, they're not revealing the full picture.
Many are AP (Authorized Persons) of brokerage platforms.
An AP can be appointed by any broker..
Some APs suggest to their followers to invest in certain stocks. This way, they are able to drive up transactions happening on certain platforms.
Under this scheme, many of the APs get anywhere from 40% to 70% of the brokerage earned by the platforms.
So there's a vested interest in driving up trading on certain platforms. This has the potential to be against the general good of the viewers.
In another incidence, recently a crypto scheme went bust.
Until a few days ago, it was promoted by some major finance influencers.
The investors’ money is now stuck.
They do add that everybody must do their own research - but that part is often ignored by the viewers.
Some influencers show proof of good returns from their own investments.
But that isn’t enough.
Some people just get lucky for a short period of time.
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Some questions:
What are you being asked to invest in?
What motivates them to run their YouTube/Instagram page?
To make matters more difficult, some influencers are very helpful sometimes, and harmful other times.
There are a lot of greys, some blacks, and fewer whites.
Some influencers are so uninformed, they make basic calculation mistakes.
There was a TikTok influencer in the US who showed a ‘hack’ to make $1,000,000 per year by earning $1,000 per day.
Yes, this isn’t making finance and investing easy for new people.
But at the end of the day, it is your money. You have to take care of it.
Make sure you educate yourself.
Don’t rely only on one source to learn something.
Cross-check everything.
See if there are any hidden motives.
The idea is very clear: you can listen to learn from anyone. But the investment decision should be your own.
In fact, the most genuine influencers avoid giving investment advice.
Never invest in anything you don’t understand and have to fully trust someone else’s decision-making.
Just to be clear: there are many genuine influencers who have truly helped their followers gain knowledge and improve financial literacy.
Many people made their first investments thanks to these influencers.
Many course-corrected from bad investments towards good ones.
Many understood things that they wouldn’t have understood without help.
No doubt, good influencers are a blessing to society.
But they are similar to the good advisors spoken about earlier in this write-up.
There are bad ones and there are good ones.
Make sure you listen to, follow, learn, and support the good ones!
Signal vs Noise
This week 20 years ago
SEBI plans more stocks under derivatives - July 10, 2002
Time and again SEBI has taken steps to make the markets more inclusive and safe.
In July 2002, SEBI was planning to increase the number of stocks under derivatives to 50 from around 30.
The main reason was to increase the volumes and the number of participants in the derivatives segment.
Volumes in the derivatives segment then were in the range of Rs 1,200-3,000 cr.
As of now, the derivatives turnover for NSE alone was around Rs 46 lakh cr on July 8, 2022. The number of stocks under derivatives is more than 190 which supports the high volumes.
This isn't to indicate anything. It's just to highlight how certain daily events that seem massive barely have any impact 20 years later while some tiny events change everything.