From the Notes of a “Noob Investor”.
India, a country having more than 50% of the population below 25 years of age. A young country means it is full of energy, enthusiasm, and expectations where everyone wants a little more of something than what they have right now. So to get this little more than the monthly salary or pocket money, people put their savings in the bank as a fixed deposit or choose public provident funds or invest in government bonds. People who want some more and can hold on to their investments invest in physical gold, real estate etc. But some people want even more and they are willing to take the risk but have no knowledge or time to track the stock market they go for the mutual funds. But there are some who are inspired by the success stories of the billionaire investors like Warren Buffet and Charlie Munger go head-on for the stock market with an aspiration to make a fortune.
If you are of my age you must have heard about some random guy or friend of your friend who has earned a good amount of money from the stock market within a short time. So you also think that let’s give it a try. But then after 2-3 months of trading, you find that you are actually losing your money. After this, many people quit the stock market cursing it is a gamble, many go on further to lose even more in the pursuit of covering their losses and some try to find out why did this happen.
So why did this happen?
Many of us think that if I invest money today I want instant and hefty returns. For those who think like that one of the successful investors, Mr. Rakesh Jhunjhunwala has said, “Try your luck in Mahalaxmi Race Course or in a Casino, not in the stock market.”
What most of us forget, buying a stock is like becoming a partner in the business so ultimately returns on the investment depends on how the company is performing.
To simplify this let us look at it through an example. Someone has started an ice-cream parlor in your locality a year ago. Since you are observing this ice-cream parlor for over a year you know how it is doing. The ice-cream parlor has its regular customer base and there is a school nearby because of which the sales are going up and despite the increasing sales the parlor has able to maintain the quality of the ice-cream. One day the owner of the parlor mentions that he wants to expand his business by opening another branch on the other side of the town and asks you for Rs.1 lakh in exchange for the ownership of 10% of his business which means if the parlor earns Rs. 20,000 then your share will be Rs. 2000. Similarly, another company in your town manufactures speciality chemicals also asking for money in exchange for 10% ownership in the business.
So which company you will choose for investment …?
I think the majority will say the ice-cream parlor. That is because you have tasted ice-cream from that parlor, you know the quality of that product, you know the owners and have confidence that they will run the business well and more importantly you understand the business whereas you don’t even know what the heck is a speciality chemical, understanding its business is far fetched.
If we apply this logic to the stock market we should prefer to invest in the companies whose business we can understand. A farmer or a person with a profession related to agriculture knows better about agri-input companies, A civil engineer knows better about construction companies, a banker knows better about banks, etc.
Investing is a long term game and if you invest your money in the business you understand fully then fortune can be made much more easily.
- Aniket Nadhe