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'Stock markets are like supermarkets'
Kanu Doshi | May 22, 2006
With market volatility increasing every day, investors need to touch base with some basic rules of investing. In a conversation with an investor, Kanu Doshi spells out these gems of investing that he learnt in the book 'Rich Dad, Poor Dad'.
Advisor: I came across a book called 'Rich Dad Poor Dad' by Robert Kiyosaki. Its on the best seller list for quite some time. This book contains gems for investors like you and me and for everyone wanting to know more about 'money'.
Investor: Then let us know about making money.
Advisor: Yes. The author in this very lucidly written book says that in life, when you desire to fly an aircraft you must and therefore you do 'learn' flying aircrafts. When you wish to enjoy a bicycle ride, you must and you do 'learn' how to ride a bicycle. Maybe you will fall several times before you finally succeed.
But a lay investor who wants to make money on the stockmarket tends to just pick up the phone, speak to his stockbroker, buy a stock and starts dreaming of becoming rich. That is not the way the rich investors who become richer with every passing day go about investing into stocks.
The rich follow the same principle of 'learning' to ride a bicycle or flying an aircraft. They therefore first 'learn' to 'invest'. They learn all there is to know about the art of investing in stocks. All about the stocks they wish to buy and only then do they take the plunge.
Above all, they keep practicing what they have learnt. They keep sharpening their saw. This single factor of learning before hand separates the rich investors from the poor investors, says the author.
What is the other gem on investing you found in the book?
There are several. The next is the author's comparison of Stock Market with the Super Market.
Investor: That's an odd one. Could you elaborate please?
Advisor: Yes. The author says that when Super Markets reduce the prices of the goods and announce a 'sale', customers flock into the stores and buy up every little item and build up at home piles of grocery, soaps, etc.
But when Stock Markets reduce the prices of shares and announce a 'crash' every investor rushes in to 'sell' and runs away from the market.
Again, conversely, when Super Markets raise their prices, customers shy away and refrain from buying till the next 'sale'; but when Stock Markets announce rising prices, every investor rushes in to 'buy'.
This is not the way, again, the rich investors behave. They follow the same principle of buying at the Super Markets. They buy stocks only when the Stock Markets crash. Ask Warren Buffet or John Templeton.
Investor: These two ideas, though simple, are no doubt educative. Do you have any other gems to share?
Advisor: Yes. As I said earlier, the author has several.
The next one, the author says, is `investing is knowing your assets'. When you move your money from your bank account in order to `invest' you are putting your money into assets like shares, real estate, deposits, etc.
The rich never keep their wealth in the form of liquid money in a bank account. They always keep acquiring assets while the poor acquire liabilities, which they mistakenly believe are their assets.
The author, citing the scene in America, says that acquiring your house through a bank loan on the mortgage of your house is acquiring a liability. The same goes for paying for groceries through credit card.
Investor: Please go on. It sounds interesting
Advisor: In life, according to the author, what is important is not how much money you `make' but how much of that money you succeed in `keeping' and `multiplying'. The rich know how to keep it because they know how to invest it. Money well invested is money well kept. Good investing is often more rewarding than good earning.
Investor: Any more such gems.
Advisor: Yes. 'Real money is made when you `buy' an asset and not when you sell that asset' is yet another gem from the author.
Investor: This one surely needs elaboration.
Advisor: Yes. What the author conveys is that the 'price' of the asset when you buy is the sole determinant of your profit on that asset when sold. If you buy that asset cheap, your profit on sale is obviously larger.
The message from the author is simple. Be careful of the price you pay when investing in an asset. Don't rush into buying any investment at any price. Wait till the prices come down the way Super Markets announce sales.
Investor: In other words, do as the shoppers do at Super Market Sales.