Thursday, October 23, 2014

Seeking Wisdom on Dalal Street: 9 Money Lessons That You Can Learn

Once Charlie Munger, Vice-Chairman of Berkshire Hathaway famously said,"Wisdom acquisition is a moral duty. It's not something you do just to advance in life. As a corollary to that proposition which is very important, it means that you are hooked for lifetime learning. And without lifetime learning, you people are not going to do very well. You are not going to get very far in life based on what you already know. You're going to advance in life by what you learn after you leave here." There are tons of wisdom in the world of investing too. Over the last several years, I have met many of the best market minds in the country. While conversing with them I have come across many pearls of wisdom shared by them.

1. Rome wasn't built in a day and so aren't great companies. It seems very logical however not many people follow the same in equity markets. To reap the benefits of good management, good economic moat one has to stay invested for long with the company. It reiterates the fact that buying a stock is essentially buying a business as opposed to buying pieces of paper.

2. You either get good equity prices or good news; you rarely get both of them together. This can simply be illustrated by what has been happening over the last few months in India with the formation of the new government. Last year, there was gloomy news however there were great companies available at cheap valuations. However, everyone was waiting for good news to pour in before investing in the equity markets - but when the good news started pouring in; the equity prices shot up and the same crowd became reluctant to buy the securities since they thought it was fairly valued. Warren Buffett has summarized this long time back - "Be fearful when others are greedy and be greedy when others are fearful".

3. We pay money to education institutions to learn; likewise we have to pay our fees to the market in order to learn. We have often heard that our near and dear ones have lost money in the stock markets; hence we should stay clear of the financial markets. However, the wisdom says that it is fair enough to lose money in the stock market in one's early days - it should be treated as tuition fees for learning, nothing more!

4. An investor is like a bottle of wine; one gets better with time. It might sound cliche at first. However, we as human beings are always evolving and the same applies to investing as well. With experience, like in most fields, one becomes more confident to make decisions with relative ease. One should never try to leap frog the process of evolution as an investor. Over time, it pays off very handsomely.

5. Investing is like swimming; no matter how many books you read on the subject, you got to jump into the pool - likewise you got to invest with hard earned money. It is definitely good to read books on investing however at the same time it is important to start investing as opposed to creating a dummy portfolio. Practical experience is the greatest teacher, more so in financial markets. It is prudent to invest with hard earned money because of the rationale of mental accounting that goes behind it. Mental accounting teaches us that we treat money differently - inherited money as opposed to hard-earned money. Hence, we tend to invest inherited money frivolously. Therefore, it is wise to put in hard-earned money in the equity markets - we will be more careful about it.

6. Power of compounding consists of two things: conviction and patience. One needs to have conviction about a company in order to stay invested. Likewise, one should be patient in order to hold the security for long periods of time. If one has patience but no conviction then the investor will most likely sell the security at the slightest sign of trouble. Similarly, one might have conviction about the company but if one is not patient enough to hold it for long, he will not benefit from the magic of compounding. The two ingredients go hand-in-hand! Unfortunately, not many B-schools teach this.

7. It is always risky to catch a falling knife. To buy more of a stock just because the price has fallen compared to one's purchase can be a very risky proposition. There have been instances in the past where in a bear market; the price has fallen 50% and again 50% from there and thereafter 50% once again. Plethora of companies fit into this category.

8. It is the learning followed by the earnings, never the other way round. The youngsters taking admission in B-schools are overwhelmed with the so called "package" that they expect to earn once they graduate. There seems to be a flaw in the framework of thinking. Wisdom teaches us that we should focus on the learning part first. This is applicable not only to financial markets but in life too! We should strive to learn more about the companies before we invest in them and consequently reap the benefits.

9. There are no mistakes in life, only lessons learnt. We often hear in the financial markets, "I made a mistake of buying shares of ...". Contrary to that, we should ask ourselves what went wrong or what did not work out as anticipated. We can learn about the promoters or a CEO who did not make the right capital allocation etc. It is of utmost importance to recognize the error of judgement made as an investor and take care not to repeat them in the future!

We would all benefit tremendously from some of the wisdom listed above only if we care to understand them. Like any big project, implementation is the key!


Shree latha said...

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