Invest in shares

I am sticking my neck out here.
I do not invest in equity - at least not directly.
So it is kind of stupid to give advice on share markets.
But here goes anyways ...

1) I believe that the world economy will recover, sooner or later. It has to.
2) The share market will also, therefore, climb.
3) If you are young, have some money to spare, and have the risk appetite buy shares in sectors that was doing well before the financial meltdown and is now performing poorly only because of financial meltdown. In other words, if the financial meltdown hadn't happened, would you expect these sectors to continue doing well? If yes, this is the sector you should go for.
4) Most people look to make quick money from share market. For what my understanding is worth, I do not think so. You may hit a jack pot once in a while, but most shares give good returns only in about 3-5 years time.

What do you say? Do you agree with me?

The truth about share markets

1. The movement in share prices are not random.
2. Herd mentality is as much evident in the share market as in any other human endeavor.
3. Share prices reflect the true value of a company. Wrong. They never reflect the true value of the company. It reflects what the stock brokers think it should reflect.
4. The share prices can go down or go up due to any reason whatsoever.
5. The share values will go down. Only then will the price come up and some one will make money.
6. All market rallies are driven by lay people who think that they can make quick money when the market is bullish.
7. You can never time the market. So, if you think you can sell when the share price will hit the peak, forget it.
8. How many people do you know who play in share market and are rich?
9. You do not make profit or loss in share market unless you sell the shares. Seeing your shares climbing sharply just after you have purchased the shares could give you immense pleasure, but it will not give you money unless you sell the shares.
10. The stock broker will always make money whenever you sell. It doesn't matter if you make or not.
11. Not opting for 'Stop Loss' is foolishness.
12. Tracking share market will always require more effort than you think.
13. You think the stock brokers know more about the share market than you do? Think again.
14. Ask a financial expert to predict if tomorrow the shares will go up or down. If the general trend is going down, she will say it will go down further. If the general trend is going up, she will say it will go up further. No rocket science here.

Investing in shares should be part of your investment plan. Not the complete investment plan.

Systematic Investment Plan

An important ground rule in your path to becoming rich is to understand that high returns are always associated with high risks. Always. So, if someone is promising you high returns but telling you that there is no risk, then that person is making a quick money - from you. So, please venture into high risk-high return schemes only if you have excess money and/or if you are young.

And then there is always the Black Swan.

A relatively safe instrument of making money from stock markets is what in India is called the Mutual Fund Systematic Investment Plan (SIP). This is particularly affective when the share market is in an upheaval. The most important think to remember in an SIP is that you need patience.

The way it works is similar to a recurring deposit schemes. You put in a fixed amount of money to the scheme every month. When the share market is down your money will buy more units. When the share market is up your fixed money will buy you less units. This averages out the fluctuations.

I actually did an experiment. I invested in a mutual fund where I paid a lump sum outright at the beginning and at the same time started investing in an SIP. After a year, the outright payment has given me a return of -14.3% (a loss) and the SIP actually gave me a return of +13.5%.

You will get more information on SIP here and here.

I see SIP as a long term investment plan. I intend to keep it up for about 5 years to see how well it works.

I also see SIP as having better Return on Investment, if you consider the effort and time required to follow the share market directly. Direct investment will most definitely fetch you much better returns, but you need to invest lot more time to understand the share market.

As long as you do not put all your money in SIP, you should be fine.

Beaten by the newspaper

This was the mid nineties (I think, or early nineties).
India was truly on the way to reforms.
The share market had recovered from the Harshad Mehta scandal.
Things were looking up.
It was possible to trade online on National Stock Exchange (NSE).

I was lucky to be working at a place where colleagues were friends too.
We decided to become rich by investing in share market.
Though I had burnt myself badly in my tryst with the share market, I was drawn into this venture.
Basically, I derived strength from numbers.

We started reading economic times.
We decided that Initial Public Offerings are too risky.
It is better to trade direct.

One day, this friend of mine brought in an analysis on Kishko Cutlery.
The recommendation was buy.
We rushed to the nearest online trading centre - this was a good 20km away.
I purchased 100 shares.
The shares plunged soon after.
All my fears about the share markets came back to haunt me.

Later, much later I learnt the dynamics of market movement and newspaper reports.

Lesson: If it is in the newspaper, you are already very late.

First steps

Late eighties.
My cousin is a year elder to me and he had then just moved to Bangalore.
I went to see him.
I saw some share applications in his room.
I knew people become rich by investing in shares.
I picked up one - Usha Rectifier.
My cousin said he was not going to apply for this company and that I could apply if I wanted to.
I should have asked him why he doesn't want to apply.
The share whose face value was Rs. 10 was in the market for Rs. 50.
Another colleague of mine who understood this a little better that I asked me to find out more about this company.
I looked it up in a finance newspaper.
It was being traded at Rs 170.
That was the only information I needed.
Wow! At Rs 50 this was a bargain!
I started dreaming how much I will earn in a few days.
The day I applied, the share value fell to Rs 110.
With a few months it fell below Rs 50.
And then it disappeared.
This share - renamed Usha India - is no longer traded.

My first attempt to become rich was a miserable failure. I went back to my shell. This way is not for me.
That was a serious mistake.
Instead of learning from my mistake and instead of learning the way share market works, I stopped at the first sign of failure.

And what was my chance of succeeding?
Nil.
I had no knowledge of the share market.
It was entirely an instinctive decision driven by dreams of becoming rich the easy way.
Doesn't work.

In all other endeavours I have always pushed hard against failure., If I slip, I push back harder.
My humble growth in my job could be attributed to my determination to do better.
But I did not transfer my resilience from one domain to another.

Making wealth was a new domain for me. I started by diving into the deep end. That was fine.
But I failed to learn from my failure.
That was a huge mistake.

Lessons:
1. It is natural to get excited when you take your first steps. Do not have high expectation. The first steps are likely to fail.

2. Be mentally prepared for the first failures. You are likely to succeed subsequently.

Years later I dabbled in shares again. But that is another story.