Note: Please welcome my friend Sumant who wrote this post after much prodding. He’ll add a lot of value to readers and he has promised to share what he has learnt from his investments. This post is about the initial journey. And as he says, he was not dumb but just a part of the majority, I’m sure a lot of you would relate.

Reading a book on Stock Investing was an easy part, as was memorising the Ratios for Stock Analysis. The difficult part was to get the data for Analysis. For an individual investor it was well neigh impossible.

I did exactly what most new investors do (Even today!). Follow the advice of the most approachable advisor. In any case I was neither equipped to judge the quality of the advisor, nor the quality of advice. And, promptly I bought a list of shares without knowing why I had bought them. All I knew was that there was money to be made at the Stock Exchange. Why I needed more money never crossed my mind & I did not know I should ask that question to myself. The concept of Personal Financial Goals was still more than a decade away from me. Those were rather carefree days of my early career, as it is for an overwhelming majority.

Come to think of it, the timing was not bad. Harshad bhai had come & gone & the market was still in consolidation phase. But I knew nothing about where I was putting my money & why. Add to that, the pain of  safe keeping of the share documents. And there was this vague fear of keeping account of the income from the shares. After all I will have to account for it in my Income Tax Statement. I could not understand the basic Income Tax Form to be submitted with the Form 16 (given by the Employer). This income from shares would complicate the things. I was scared. Please do no laugh. I actually had a vague fear of managing all that mumbo-jumbo. I was a very law abiding citizen & I was expecting to make big money at the Stock Exchange!

The problems did not end there. It was tough to keep track of the Share prices. Forget about Ratio Analysis & all that. That was only meant for serious Analysts, who would get published in the Dalal street, Financial Express, etc.

It did not take very long to get totally frustrated. As luck would have it, the shares I had bought were not doing well. If I had been lucky, my story might entirely be different. It is easy to see how important a part Providence plays in our life!!

I gave up. I just folded all the Share Certificates & locked them in safe-keeping (!). They were to remain there for almost a decade & more!!

Things may have been different if:

1. I had made money in my first few transactions. But, again that would have been purely a matter of luck.
2. I had read enough about Indirect & Direct Investing and chosen the Indirect Route to Investing & put in a small amount through the Direct Route to learn the tricks. That would probably have given me enough time in the market to learn the tricks & also given my shares enough time in the market to perform (& give a realistic return). It is difficult to accept & understand a realistic rate of return in Stock Market. One has to accept that the Stock Market, after all, is not a currency minting machine.
3. I had a Financial Goal. Even as simple a goal as having a flat of my own in Mumbai (then, Bombay). That would have probably given me a sound reason to make more money & a target. (Believe me. Till then I only knew that surplus money was something you just kept in the bank!! Please do not conclude that I was dumb. I have a feeling, like always, I was a part of a majority.) I would possibly have been more realistic in my expectations. Would probably have been more patient.
4. I were experimenting in 2005/06 & not 1993/94. I may possibly have read the blogs of many a stock investor & absorbed some wisdom. That is again providence & far fetched.

Anyway, I was off Stock Market & none too wiser. But, of course, I had all the reasons. My favourite argument was:

“While one person is selling the shares & feeling smart, the other buys & feels he is smarter. Both of them cannot be correct. I think the person who is better informed will be smarter. I reasoned that I will always be the loser because of my limited knowledge compared to those who are in the trade full time.”

Nothing wrong in the logic. Except that it got me nowhere. With logic you can justify any thing in the world. It is often just a cover for your lack of knowledge & wisdom or plain hard work & application.

Now I can say that, indeed in the long run the money in the Stock Exchange can come only from the Value created in the factories & offices. So almost everybody should be a winner if you are buying/selling scrips that create value, seen from a long term. In the short term, however, there are a host of factors that drive up or down a scrip. Most important of all, I think, is market sentiment.

The most important principle, therefore, is to be able to identify businesses that would perform well & stay invested till you think that the business will continue to do so. Of course, the valuations are important. But if you are a long term investor (You should be, if Stock Investing is not your primary source of income!) current valuation of a scrip is much less important than the quality of the business & its future prospects. And, there are simple mechanisms whereby you may even out the valuation of purchase. By investing through SIP, for example.

Let me get back to explaining my favourite argument against stock investing:

“If one person is buying and the other is selling, both may be winners. The first may be in need of cash, or he may just have made his targeted profit. The other may be buying it for the long term or he may still be seeing value in the stock. Indeed, ‘Time’ is a major factor in stock investing.”

Needless to say, today I am a firm believer in the power of Stock Investing. It is a sure way of making your savings work for you. It is a tool to achieve your Financial Goals. It is a tool whereby you can participate in the great Indian success story that is unfolding.

Sumant Kant Sahai

PS: Checkout my next post on this blog to find out how I re-discovered the Stock Market.

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McKinsey research shows that equity analysts have been overoptimistic for the past quarter century.

On average, their earnings-growth estimates—ranging from 10 to 12 percent annually, compared with actual growth of 6 percent—were almost 100 percent too high.

Only in years of strong growth, such as 2003 to 2006, when actual earnings caught up with earlier predictions, do these forecasts hit the mark.

You can read the entire Mckinsey report here. You need to register.

And here’s another study that I wrote about sometime back:

Further, DALBAR’s update of its Quantitative Analysis of Investor Behavior (QAIB) study found that for the 20-year period, equity fund investors averaged 3.17% compared to 8.20% for buy-and-hold stock investors (S&P 500)

How about taking a look at the 88% solution!

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