February 25, 2006

Thinking independently

There is generally no shortage of recommendations, tips, or get rich - schemes which are pedelled to the general public. You will notice that the number of such ‘schemes’ (for want of better word) increase almost proportionately with the rise in the corresponding asset or the market. So if there is bull market in gold, you will find more of such tips for the gold market. If the stock market is up, then you will get such schemes for the stock market.

Just think about it, how many recommendations or tips did you see for gold in 1999 (gold was 3900 at that time) or for the stock market in 2003.

And now gold is being touted as an investment and so are a lot of low grade stocks. Mutual funds who are supposed to be for the small investors are no better. Try to check on the number on new launches in the last one year versus 2003. I don’t blame the industry for more launches now, because the subscription would be low if the fund gets launched during the bear market. What irritates me that these funds play on your greed. Now you can argue that if one is greedy then one deserves to be punished for it (well , I definitely was for all the IT funds I bought in 2000). But is the behaviour of the mutual funds not that of a drug dealer who supplies the drug to an addict (rather than a doctor or counseller who prevents it)

So what is the antidote to all of the above. The starting point of this post was this comment from abhijeet . If you know that there are people trying to part you from your money, either by preying on your greed or fear or through fraud, how does one protect himself? Here is what I think

No. 1 protection is knowledge. Learn how to invest. I have mad
e it a point never to invest money in any opportunity if I don’t know what are the risks in it (rewards will take care of itself). Now, I have lost a number of opportunities by that, but have also avoided severe losses.

In my case, I tend to remember the losses far more (I think my pain for loss is far more than average) than an average person. It is not the loss of money which has hurt (that hurts too) as much as loss of faith on my own skills. In cases where I have made a bad decision, I tend to remember that very long, even if I may not have lost as much.

As a result, I am extremely cautious in making my investment. That is not same as avoiding it though. The difference is that I try to do as much homework as possible on an opportunity. I try not to make a decision immediately if I find a good opportunity. I make my notes and wait for a couple of days. Then when the intial excitement of finding an undervalued stock is gone, I tend to be more rational.

Finally, I never go any one recommendation. I read a lot of broker reports, blogs etc. but never accept any recommendations on face value. So if I find a recommendation, I try to analyse it on my own and reach my own conclusions.

In some areas which are out of my circle of competence or interest, I don’t even bother. They include gold, commodities etc. Does not mean that one cannot make money on them, just that I am not competent to do it.

Finally, my thinking is derieved from this quote from warren buffett

‘Risk is not knowing what you are doing’

ps: by the same logic, please do not base your decision on stocks which I post here.

1 comment:

abhijeet said...

The post by you is really an eye opener,thanks alot for answering a part of my querry, you are very right when you say that one must do a thorough research,my own experience says that whenever i acted on tips most of the time i ended in red,and now,when i have decided not to expect too much from the stock market, actually i am getting too much and to without doing anything.Earlier i used to speculate and the average holding time of any share for me was not more than a month????but now i have invested in 10 companies with a time horizon of two years...i think too much by my standards, but then this saves a lot of time.Moreever i have not to open ndtv profit website 20 times a day......