Updated: Mar 3, 2020
Imagine buying a new car. We typically spend weeks of research before finalizing on the car. We seek reviews and recommendations, visit showrooms of different companies, do a test drive, etc. Most importantly, we also evaluate if against our budget, needs and closely look at all the specifications.
We do a pretty much similar exercise when buying a new laptop or a mobile or any other high value product. We spend significant time evaluating the best options and deals available and ensuring that they match our requirements. We are overly cautious and mostly skeptical to whatever the salesman tells us. We often look at advertisements with mistrust. We don’t simply buy just because an article in the newspaper said we should. For most of the people, it is an inherent belief that the companies might not be acting in our best interest as the company might be more interested in making money.
In fact, we end up spending more than an hour looking for the best deals when simply booking a flight ticket or buying groceries and other stuff online (at least I do). We spend significant time and effort on buying products which might not even last a few months and whose salvage value is most likely zero or negligible.
Interestingly, when it comes to managing our personal finances, things take a completely different turn. How many of us spend even half the time before we decide on our investment options and the best products to invest in – something which will last our lifetime and we rely on to make our future secure and stable. How much research do we do on our own as far as these investments are concerned?
While making financial investments, most of us start trusting our broker or the person appearing on news channels or even random news paper articles. I am not sure how many of us actually go out and do the required due-diligence to check if we should really trust what that person is saying, what his/her credentials are, past performance record, etc. We often end up investing based on “stock tips” from friends and family (without questioning or understanding if they have any basis for the recommendation or they again got a “tip” from someone else). To top it all, some of us even listen to the advice given by random brokers doing cold-calls and pay heed to the Stock Advisory SMS we get on our mobiles from completely random, unknown sources.
I am no better and have myself fallen prey to some of these "Tips" in the past (I am yet to come to terms with myself as to how I could be so naïve and foolish– fortunately the lesson came early enough) and I still see people around me getting trapped. However, given how these advertisements and articles are projected (so and so made so many crores in 2 days / experts suggest this stock will rise xyz% in next 1 year/ 15 Analysts recommend a "Strong Buy"/ this stock has given 1000% returns in x years, profits of this company rise by 200%, etc. etc. ) it is difficult not to get lured.
I am not saying that all recommendations are bad or any such thing. However, if we are investing for the long term with a view to compound our profits, we can’t blindly invest based on a single news item or recommendation. It has to fit into the overall portfolio. Also, you never know at what price-point a famous investor has entered the stock, what is the weightage in the portfolio (for all we know it might be just 0.001% of his overall portfolio) and when that person may exit his/ her position and you are left with a dud.
The point I am trying to make is that we might not be spending sufficient time and effort before investing our hard-earned money (The amount could be as small as Rs 5000 or in Lakhs, it doesn’t matter). Given how easy it is to invest these days (simply download an app, buy a mutual fund or stock), the chances of making errors or taking decisions in a haste is even higher.
For those of you who might be saying I don’t fall prey to these traps and have safely parked my money in Bank savings account and Fixed deposits, I would suggest you read my articles on “No savings are small” and "Impact of 1% and magic of compounding". Not investing due to ignorance/ fear is not a smart move either. Given inflation, it might actually be eroding your wealth only.
The way the financial industry works, everything has been made extremely complex. We are bombarded with hundreds of complex terms everyday –
However, here’s the best part – for long term wealth creation, you do not need to know most of these. Sure, you need to know some, but they are far more simple and easy to understand than what is projected. At least, if you can’t devote the time and effort to pick the best investments, you can definitely know what to avoid so that you can filter out 90% of the options.
Few of the other things which I would like to mention:
Personal finance is not as complex as it is made to be
In order to grow your wealth in a healthy manner, you need to learn some aspects of it. At least the basics - there is just no other way
Falling prey to luring articles and promises of huge gains in a short period of time will only destroy your wealth
You will rarely see the highly successful and respected investors (those who have actually created wealth from equities) giving any actual stock recommendations if at all – it is others who use their names as a basis for giving recommendations
Some of the really good investors/ portfolio managers, who do give recommendations, will back it up with solid research and reasoning – they will never state that because so and so person has invested, hence it is a good investment. Also, there is no such thing as free lunch. Most of the people disclosing their holdings do it long after they have entered and already reaped the gains
Even nominal gains of 11-12% are sufficient to create wealth in the long term (provided you start early, stay invested and let your money compound) – Please refer to my article of Magic of compounding
Creating wealth through equity investing (unless you are gambling) requires patience and a long term view. I haven’t found any short-cuts – please do let me know if you know some.
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