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11 important points investors must know

May 02, 2015 15:00 IST

Before you enter the big, bad world of investing, trading, etc., beware...

When I see people trying to invest I see them make many mistakes. Clearly as an amateur you will not know how to hit sixes and fours... all you need is to know where is your off stump and spend long hours at the crease. The runs will follow.

Let me enumerate:

1. On free sites/blogs/groups people come and talk like experts. Let me repeat just because you have access to all the tools that Pattabhiraman Murari of has made, it does not mean you know how to apply the calculators. It is not easy. How many people can use it honestly?

2. Costs are important, but they are NOT everything: One swing of the bat and it could be a home run. This of course is a baseball saying. Please understand that a good fund manager is worth paying the money.

3. It is not easy to know when to shift and why to shift. So if you have found a decent comfort with the way a fund works, it is not too bad to stick around even during bad times. Sadly there are people who will suggest jumps, but if you do not know how reversion to the mean works all such jumping could be futile.

4. For 99 per cent of the people reading this post, SIP works. If you were 100 per cent in debt and have now moved to 10 per cent in equities reading about equities is NOT going to help. In fact in your overall portfolio, there is going to be very little impact.

5. Almost all literature in the investing field is from the US. Almost all the good writing is from the 1930s to 2015. Remember such a Golden Period -- when US was (is) a military power, controlled oil prices, currency rates, world political view, had cruel policies of exporting cancer (tobacco, McD, acid drinks), had NOBLE investors like Warren Buffett (his health is luck and his personal life is not really exemplary)... and controlled the press. So what you read has to be taken with a pinch of salt. Look for literature from other free markets too.

6. Confirmation bias: Once you decide something, the Internet will throw you tons of literature that will make your brain look good. So the 'selecting' part of your brain selects stories that you WANT to read rather than stories that you MUST read. Dangerous zone.

7. Recency bias: The latest sounds best. This is sad because I get 50 research reports a week ATLEAST in my inbox. I do not read anything outside my range of about 75 stocks. I read nothing about the economy, oil, gold, interest rates. It helps. The latest report is not necessarily the best.

8. The best share may already be there in your portfolio. With Cholamandalam in my portfolio I did not look to invest in M&M Financial services and L&T Finance (except for some trading opportunities). Many of the 'investors' I am meeting churn as much as traders. Not knowing whether you are a trader or an investor is harakiri.

9. Politics: I am not at all sure that the press is telling us the truth. We are hearing what they want us to hear. I actually have no clue whether NaMo is doing a good job or a bad job. For me to find this out (no frankly I do not care, but just giving an example) I have no clue what to do. Reading newspapers is ONE SURE WAY TO GET IT WRONG. So stop spending time on the political situation.

10. Cherished myths: ITC is a good company, if you had done SIP in a single stock like L&T you would have got better returns than many mutual funds; a SIP in stocks will work as well as a SIP in a big fund. All are absolutely true, but we do not know whether it will be true over the next 20 years that you are planning to invest.

11. Do your homework: As a blogger I can say that I offer no solutions, so go and find it yourself. Most 'solution offerring' websites are here to sell something. Nothing wrong with that, but know that personal finance sites which do not sell do not exist. So do your homework. Learn, do not copy.

Illustration: Uttam Ghosh/

P V Subramanyam