The first rule in the art of investing is to cut down risk and live to fight another day. As Warren Buffet said, if you want to finish first, you must first finish. And what is risk but just not knowing what you are doing?
So, our objective in doing this special package of stories is to provide you the basic building blocks that will help you appreciate what you need to know. To know is to survive. Understanding risk is absolutely the beginning. The following pages will help you take that first step, but it is up to you to take the further steps required for successful investing.
The leitmotif that runs through all the stories and binds our discussion on the various asset classes is that investors can benefit from equitable and balanced economic and social development of India. GDP growth is an important element of that development, but by no means the only one.
Since it is not just growth that creates investment opportunity, it is important not to get carried away by focussing only on headline numbers of growth. Drill them down to the islands of opportunity across asset classes and within each asset class. We will not exactly point out what your choices must be but will equip you to choose.
Investing is all about common sense. It is not about making the right calls all the time. Everyone will make an occasional mistake and lose money. As long as it is not big enough to sink you, you should not worry about it. Instead, focus on thinking through your process.
That process has a few elements. The first among them is knowing why you are buying an asset. When you look at something as an investment, don’t let your sentiment, emotion or aesthetics come in the way. If you really love something, say a work of art, do buy it for your personal enjoyment. But when it comes to investing, back the potential winners even if you don’t have a fancy for them.
Next, armour yourself against the unholy trinity of investing that can kill you – liquidity, volatility and leverage. Ask yourself these questions: 1) In adverse conditions, what is the probability that I will be able to sell my investment quickly? 2) What is the maximum downside to my investment when prices fluctuate violently? 3) What is my own contribution to the investment and how much is funded by borrowing... When the market falls or interest rates rise, can I survive?
The third aspect of sensible investing is knowing your transaction costs. You will incur them when buying and when selling. You must fund both the ends with your returns. Look at ways to reduce your transaction costs. Avoiding frequent churning of portfolios is an obvious way.
You also need to have a realistic expectation of returns and fix an appropriate time-frame. Returns are not front-ended. They take time to fructify. And when you have attained that expectation, sell. Don’t get greedy. Smart selling is every bit as important as sensible buying.
The virtues of diversification are all too well known. But diversification carried to excess reduces returns. With too many investments, you will not be able to pay attention to any one of them. And you will stop knowing what you are doing. Now, that is risk.
Finally, don’t get stuck in the Holy Grail of investing by getting obsessed with one technique. Growth investing, income generation, value investing are all good techniques that work in certain times and fail in others.
The message of our Investment Guide is clear and direct: The really smart investor does not focus as much on outcomes as on how he goes about investing. Process, process, process. He is not concerned by the occasional bad break. He just concentrates on trying to make decisions in a sensible way.Please Read : INVESTMENT GUIDE 2010
(This story appears in the 22 January, 2010 issue of Forbes India. You can buy our tablet version from Magzter.com. To visit our Archives, click here.)