Tips to become a smart investor

Once upon a time, Emperor Akbar summoned his chief minister and told him to come up with something that would immediately change the Emperor’s mood. If he was feeling sad, he should instantly feel happy and if he was in a good mood, he should feel sombre again. The minister had one week to discharge the task else, he would be severely punished.

Needless to add the minister was beside himself with panic. There was just no way that he could fulfil the emperor’s command and that too within a week. It was impossible. So he did the next best thing by approaching Birbal with his woes. Upon being briefed, Birbal just smiled and told the minister not to lose heart — after all they had a week to think up of something.

Days passed and the end of the week was fast approaching. Every time the minister approached Birbal, he was told to be a bit more patient. Finally D-day arrived. Having spent one sleepless night after another, the minister had more or less come to terms with his fate. He had not come up with anything and neither it seemed, had Birbal. Emperor Akbar’s wrath was well-known and there was no way that he could escape from doom.

There was an uneasy silence in Emperor’s court that day. All other ministers empathised with the plight of their fellow member but were basically helpless. The emperor summoned his chief and it was with a feeling of great dread that the minister slowly started approaching the emperor. As he was passing, Birbal slipped a piece of paper into the chief’s hands and whispered, “Just show this to the emperor”. The chief had no idea what the piece of paper contained, neither was there any time to read its content. He just dumbly handed over the paper to the emperor and waited to be condemned. However, upon reading the paper, the emperor’s face lit up into a large smile. The chief minister was congratulated and duly rewarded.

Now the obvious question is what did the piece of paper say? It said, ‘This too shall pass”. In other words, whatever you are going through life as of now, be it great happiness or unbridled sorrow, know that it is temporary — it is transient. Just like night follows the day and day follows the night, in due course it will pass and be replaced by some event that may just bring out the opposite emotion. This is one of life’s fundamental principles.

So why do we forget this principle when it comes to investing in the market?

Think about it — if the market is rising it’s because of the great India story, strong corporate earnings, a fundamentally strong economy — FIIs can’t have enough. And in no time, the market takes a downturn and all these factors are forgotten. The FIIs suddenly have had enough, oil prices have skyrocketed, domestic interest rates have been flat and elections are around the corner - no one really knows how this exactly is detrimental to the market so soon but still condemns it as a catalysing factor. Finding reasons for occurrences is human instinct and in some cases a means of keeping one’s job — however, we cannot help but feel that generally folks aren’t having a fix on the course of the market.

Actually, making money in the market is simple — Buy low, Sell high. However, as straightforward as this may sound, we know from personal experience that it is one of the most difficult things to do. For the simple reason that it goes against basic human instinct.

When the times are good and the indices are flourishing (as they were sometime back), the first impulse is to try and participate in the party. This is done by buying shares. And the first part of the above rule is flouted. Eventually, the inevitable happens when the bull-run ends and the valuations cool down. Panic sets in and shares are sold in a hurry — thereby flouting the second part. In the end what happens is that one ends up doing just the opposite — buying high and selling low. This cycle keeps on getting repeated unless one makes a conscious effort to come out of it.

And you can only come out of it when you have the courage, gumption and more importantly the conviction of buying low and selling high. Know this much — Five years on, it’s only those smart investors who are actually buying in the market currently who will be smiling. Don’t take my word for it — take history’s.

It’s not as if I have not made the same mistakes ….. having learnt these lessons the hard way, just thought will share them with you. In fact, my very first investment technically was a Recurring Deposit in a bank across the road. As a child and a student, it was my graduation of sorts from the piggy bank at home. Breaking it open was an event that I have vivid and fond memories of. Working on the parents as only a child can, I managed to add two hundred rupees to my princely capital of eight hundred and soon I was the delighted owner of a Rs1,000 bank deposit. Periodically adding to it gave me a special thrill as it meant a visit to the bank and acting all grown up.

Looking back, the RD, proved to be a great investment. Though the capital was nothing that would make a Warren Buffet look over his shoulders, the entire process, perhaps, instilled a sense of savings discipline at an early age. Not to mention the fact that I could use the money to make my very first foray into the stock market…..100 shares in a well-known scrip was my first investment as a professional.

Actually, talking on this subject brings tears to my eyes, not on account of the nostalgia but because as a novice investor, I made the mistake of getting out of the stock way too early….just as soon as I had made a few bucks. Had I held on, perhaps Mr. Buffet would really have looked over his shoulders!

Anyway, jokes apart, the message is that investing (whether in debt or in equity) is all about the long-term, for that is when the power of compounding really works. Coming in and getting out frequently hampers the journey — for when it comes to investments, it’s the journey that is more enjoyable than the actual arrival.