If I Was Just Starting My Investment Journey in 2014, Here’s What I’d Do

In last few posts about Indian markets making new highs in 2014 and possibility of Sensex reaching 40,000 in next two years, I have been quite vocal about the recent rally. I have a strong feeling that Indian markets are pricing in a lot more positive news than what is actually possible in reality. In simple words, it’s the over optimism about the next government that is driving the markets now instead of fundamentals.

Just today I had a chat with a colleague of mine who seemed much more confident about Sensex reaching 35,000 in next 1 year than he was about Fixed Deposits giving more returns than Savings Account. 🙂 🙂 🙂

But when old timers like this person are so excited about future of stock markets, then can we blame the new ones entering it now?

I don’t think so…

Over the last few days, new recruits have joined my organization (employer). For sake of introduction I had a small talk with these guys. And the small chat made me realise that they were well on their way to commit the typical newbie mistakes which are quite normal in rising stock markets. These people are yet to get their first salaries and they are already sure what they want to do with it. If it was just about shopping for things which they always desired but never bought, then it would hardly have been an issue. But rather they are interested in putting their first salaries in deadly F&O (Futures & Options) game. And that is what concerns me. F&O are instruments where you can loose more than you invested. And I am sure that these guys are yet to understand this harsh truth.

To put it on record, I don’t think it’s a good idea for them to get into F&O…

And for benefit of many students who have recently joined their first jobs, I decided to jot down a few pointers….

Young & Fresh Out Of College?? Read Below…

College Graduation Job
Done With Studies? How to manage your money starting from first salary.

  • Stock markets have rallied sharply. It’s very easy to feel that markets are the place to make a quick buck. But this not true. Its tough to consistently make money in stock markets. Period.
  • You might think that because markets are continuously rising, there is no risk in stocks and it will continue going up. This is also bull shit. Higher (& quicker) the markets go, riskier it gets.
  • No matter what your parents, new colleagues or friends tell you, just buy a simple life insurance Term Plan before investing even a rupee in stock markets. Do not go for endowment or money back plans or ULIPs.
  • Do not buy stocks now. Its not a very good time to start investing. Just wait for a while now.
  • But if you still want to go ahead and buy stocks, keep a small amount as your ‘play-money’. Use this money to buy shares you want. But…do not add any additional money even if your investments become profitable from the very first day.
  • Start paying off your education loan as soon as possible. (if you have it)
  • Do not use credit cards just because it gives you reward points.

Stick with what I have said above and I assure you that you won’t regret it when sanity and common sense returns to our stock markets. 🙂 🙂

And if possible, read this.

Happy investing and be careful out there.

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One Big Lesson from the Wolf of Wall Street!!

A few days back, I saw the Hollywood flick Wolf Of Wall Street. And since I am no pro in writing movie reviews, I decided to share with you guys what I believed was the most important thought of the movie for a long term investor.

wolf of wall street
Still from the movie The Wolf of Wall Street (2013)


Though the movie is all about brokers and short term trading, it had a dialogue which should be recited by a long term investor everyday!

By the way, if you haven’t, then please go and watch this movie. It is almost three hours long, but totally worth it. And rest assured, you will not get bored for even a moment.

The following statement was made by the character of Jordan Belfort, played by Leonardo Dicaprio to a Swiss guy while discussing laws of banking:

“I’m a student of history, and I’m a firm believer that he who doesn’t study the mistakes of the past is doomed to repeat them.”

So the thought which I am referring to is:

Learn From The Past

And if you think deeply, this statement by Jordan Belfort is indeed a powerful one. And it is not only applicable to stock markets, but to other areas of life too. Studying past events tells you why some people succeeded while other failed.

For example, unless and until you are aware of the carnage of 2008-2009, you will never be ready to face the next market crash. And unless and until you know that there is a definite relation between market P/E multiples and long term returns, you will not be able to take advantage of such situations.

Just imagine the money made by people who invested in 2009. Ten times….Fifteen times their initial investment in next 2-3 years!! And that too by investing in safe and stable businesses!

And these were no extra ordinary people. These were normal people who were aware of the fact that such opportunities come once or twice in a lifetime and hence, took bigger bets which eventually paid off.

And for those who thought that this movie was a work of fiction, please be informed that it is not. There was a con-man named Jordan Belfort and I would advise you to read more about the real Jordan Belfort here.

Jordan Belfort Wolf of Wall Street
The Real Life Wolf of Wall Street 

And don’t forget to watch the movie and share your thoughts.

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Long Term Investing Vs Short Term Trading

Do you believe in long term investing? Or is it that you do not believe in short term trading? 
 
Irrespective of what you and I believe in, the fact remains that it’s a big mistake to simply ignore short-term(ism). Short term trading can deliver quick returns. Period. But are these (eye-popping) short-term performances sustainable over long term? And why is it that after every crash (2000, 2008, etc), it is the traders who are wiped off and it is the long term investors who are not? There must be some reasons why traders have such high (market) mortality rates?
Lets look at it from another perspective. When we talk about investing or trading, what we are indirectly referring to are the time horizons. Now these time horizons are relative. Your long term can be short term for someone else. One of my close relatives has been investing for last 30 years. According to him, anything less than 10 years is short term!! And just one of the stocks in his portfolio happens to be HUL (Hindustan Unilever Ltd). After adjusting for bonuses, splits and dividend re-investments, his average price per share works out to be Rs 2.00/- (No…it’s not a typo); and HUL is currently trading at around Rs 570. Add to it the current annual dividend of Rs 7.50 per share. i.e. He has a capital appreciation of 28,400% and earns 375% (on his original investment) in form of dividends every year. Now can a trader match that? That too, year after year? One may argue that one can. But figures like 28,400% & 375% make it really hard for traders to challenge this long term investor’s approach of terming anything less than 10 years as short term. 🙂
Now these time horizon also depends on one’s risk appetite. It is a known fact that in short term, markets are volatile i.e. risky. So if one cannot take much risk, then he is not suited for short term trading. He is better off investing for long term by picking up good, solid companies or investing systematically in mutual funds. The longer you have to invest your money, the bigger risks you can take. If you need money in next few years, you should take a more conservative approach and put it in banks or other safer investment products like Bonds, RDs, FDs, etc.
For an average investor like you and me, anything more than 5 years can be termed as long term. Five years is a long enough time to assess whether a company is doing good or not. I personally define my long term as more than 10 years. What about you?
 
Disclosure: No positions in shares of companies mentioned above.