Financial Principles by Jason Zweig. Guaranteed to Make You Smart.

Jason Zweig Investing Principles

When it comes to investing or personal finance, there’s a world of difference between a good advice and an advice that sounds good. It might not seem obvious at first, but there is.

And Jason Zweig is one of the best financial writers, who regularly doles out good advice. He prefers to say that he is not smarter than everybody else and that he only knows a lot about what he doesn’t know.

But like million others, I personally think that he is one of the best out there. In 2003, he edited Benjamin Graham’s The Intelligent Investor– a book which Warren Buffett has called ‘by far the best book about investing ever written’.

This speaks volumes about who Mr. Zweig is.

While reading through the archives of his site, I came across his set of principles (link), which I had somehow missed till now.

And this speaks volumes about my ignorance. 🙂

The principles are so accurate, clear, flawless and spot-on, that I couldn’t stop myself from sharing them with you.

The principles focus on using common sense in investing and personal finance, to achieve our financial goals. And that is something, which should be everyone’s concern.

Rest of the post is about those principles. I strongly recommend you read it now, bookmark it, print it and read it again… and again in future. Atleast I will be doing it.

So here it is…

Jason Zweig’s Statement of Principles

 Successful investing is about controlling the controllable. You can’t control what the market does, but you can control what you do in response. In the long run, your returns depend less on whether you pick good investments than on whether you are a good investor.

The first step to reaching your financial goals is to make sure you set goals that are reachable. Your expectations must be realistic. The stock market is not going to provide a high return just because you need it to.

The second step is to recognize what you are up against. Despite what all the daily market reports make it sound like, investing is not a game, a sport, a battle, or a war; it is not an endurance contest in a hostile wilderness. Investing is simply the struggle for self-control – the unrelenting effort to keep yourself from becoming your own worst enemy.

The market is not perfectly efficient, but it is mostly efficient most of the time. Attempting to beat the market may often be entertaining, but it is seldom rewarding.

There’s nothing wrong with gambling on poor odds, as long as you admit honestly that what you’re doing is gambling and as long as you put only a tiny proportion of your wealth at risk.

The brokers on the floor of the Exchange clap and cheer when the closing bell clangs every afternoon because they know that no matter what the market did that day, they will make money – because you tried to. Whenever you buy a stock, someone is selling it; whenever you sell a stock, someone is buying it. Most of the time, the person on the other side of the trade knows more about the stock than you do.

However, you don’t have to lose just because other people win, and you don’t have to win just because somebody else loses. You win when you stick to your own long-term plan, and you lose only when you let greed or fear goad you into changing that plan.

The right time to buy is whenever you have cash to spare. The right time to sell is when you have an urgent and legitimate need for cash. If you buy because the market has gone up, or sell because it has gone down, you are letting 90 million* strangers rule your life with their greed and fear.

* In American context

Once you lose money by taking too much risk, the only way you can earn it back is by taking still more risk.

If you lose 50%, you have to earn 100% just to get back to where you started. And if you lose 95%, you need to earn 1,900% before you break even. You may be able to do that once or twice through sheer luck alone, but the more often you have to try it, the more likely you are to end up broke.

All too many people live their investing lives like hamsters on a wheel, running faster and faster and getting absolutely nowhere.

If you want to have more money, save more money.

Investments that outperform in a bull market are certain to underperform in a bear market. There is no such thing as an investment for all seasons.

That’s what diversification is for: to protect you against the risk of putting too many eggs in the wrong basket. And buying something that has just doubled, in the belief that it will keep on doubling, is an extremely stupid idea.

Your goals are a function of all your life circumstances: your age, marital status, income, current and future career, housing situation, and how long your children (or parents) will be dependent on you. Risk is a function of probabilities and consequences – not just how likely you are to be right but how badly you will suffer if you turn out to be wrong. Investors tend to be overconfident about the accuracy of their own analysis – and to underestimate how keenly they will kick themselves if that analysis is mistaken.

Understanding your own shortcomings as an investor is far more important to your long-term success than analyzing the pros and cons of individual investments.

In the short run, hares have more fun; but in the long run, it’s always the tortoises who win the race.


Indian Markets At All Time Highs | Should You Buy? Or Should You Sell?

I recently shared this image on Stable Investor’s Facebook page.
Stock Market Buy Sell Low High

And to be honest, this is not the first time I am sharing this image with Facebook Fans. I have shared it more than thrice. And it is because the image is a very powerful depiction of what actually happens in our stock markets. Investors Market participants act so irrationally on just what they hear on the street that sometimes it seems market, is just one hell of an irrational place. But then this realisation occurs that it is because of this irrationality, that rational investors get an opportunity to make money in stock markets.
Just last week, markets hit a new life time high.
2008 Indian Market Crash New Highs
2008 – 2014 | Markets Reaching New Highs | But Does It Give Red Signals?

The rise this time is not as steep as it was in the run up to the crash of 2008. The PE of market at peaks of 2008 had reached almost 26!! Currently, markets are in more (not totally) rational territory of 18 to 19. But it seems that since 3 months, markets have started running ahead of their fundamentals. And if one uses a little common sense and is aware of stock markets, this can be cross checked with views floating in the market. Almost all experts of stock markets are coming out with buy calls and asking investors to go ahead and invest in currently rising market. And many are planning to ride this run up to the elections.
But a little rational thinking would make one realise that one should buy when prices are low, and not the other way round. Even the master investor Warren Buffet has said
And as of now, people intend to make quick money in the markets and are being greedy (to a degree).
But there is another interesting indicator which somewhat refutes the above stance. I just did a comparison of returns in last 5 years with that of returns in next 5 years. It was a simple exercise to see whether there exists a correlation between what has happened in last 5 years with what is about to happen in next 5 years.
And results of the analysis of 3614 data points (spanning more than 14 years) boils down to the following table –

Stock Market Returns 5 Years
Currently, Indian markets have given a return of almost 4.5% in last five years. This puts us in the second cell of table above; which translates into an average return of almost 14% in next five years. So does it mean that Sensex, which today stands at 21,919 would reach more than 42,000* by 2019??
* (Logic: This calculation is based on concept of compound annual growth rate. In this case, an average increase of 14% every year for next five years would take Sensex from 21919 to 42000)
I know you are thinking that this guy refutes anyone giving out predictions about future levels of Sensex. And here he himself is throwing numbers like 42,000 for Sensex in next 5 years!!
But please realise that this not me. It is the past that is speaking. And one cannot just depend on past data to predict future. So take the above numbers with a pinch of salt. Anyways, data is one thing and using this data another. So what should a sensible market-fearing investor do at this moment?
Since everyone is eager to buy, a sensible person would be better off not-buying. And if it means that you might just miss the next bull run, then so be it. It is always better to control the downside before worrying about the upside in stock markets. (My thoughts || You are more than welcome to differ) 🙂
If you have your SIPs in good mutual funds, then do not stop them. Just continue with them as in the long run, this stopping of SIPs might disturb the magic of compounding.  Keep accumulating money in fixed instruments to fund your next major stock buying opportunity when markets go down and everyone else is hell bent on selling everything they hold.
So, what are you going to do now? Will you buy? Will you sell? Or will you do nothing?