He had bought some shares more than a year ago and sold them at a hefty profit. Now, he wanted to reinvest the profits in the stock market.
When someone told him the market was volatile, he said he did not care if he lost the money.His reasoning: "This is 'surplus' money that I made. It is not my salary or bonus. So if I lose it, I lose it."
Playing roulette with your money
This reminds me of a story I read of a honeymoon couple in Las Vegas. They decide to allocate $1,000 for gambling. By the third day, they lose it all.
That night, the groom sees an object on the table. He realises it is a $5 gambling chip they have saved as a souvenir. For some strange reason, the number 17 on the chip catches his attention (it seems to glow).
Taking it as good omen, he rushes down to the casino. He moves to the roulette table and places the $5 chip on the square marked 17.
The ball hit 17 and the 35:1 bet paid $175 (any single number in roulette has odds of 35:1).
He let his winnings ride (meaning he let the entire amount stay in the 17 square).
Lady Luck smiled at him and, once again, the ball landed on 17. He now gets $6,125 (35 x 175).
This happens thrice till he lands up with $262 million. Lady Luck must have been grinning at him!
Now he has a choice. Should he let his winnings ride? If his winning streak continues, he will get more than $9 billion. Or should he walk away with $262 million?
He decides to take the risk.
This time the ball lands on 18 and he loses everything!
Dejected (and broke), he ambles back to his room.
"Where were you?" asked his bride as he entered their room.
"Playing roulette."
"How did you do?"
"Not bad. I lost only $5 dollars."
Moral of the story?
When I read this story, I could not help but think of my friend Navroze. This was exactly his mentality.
The young groom had paid $5 for a chip and lost it. He started his evening with $5 and it was gone. So that was his loss (at least in his mind). He just put the millions he had won behind him.
But, had he stopped gambling and walked away with his winnings, he would have been a millionaire many times over. It was real money he gambled had away!
Navroze had the same mentality. The profit he made on his shares was a real profit. He could invest the money or spend it.
I could not understand why he was not concerned with the possibility of losing this money.
Money made by investing in the stock market is as real as your salary and bonus. Why should it be treated so frivolously?
How should money be viewed?
Put your windfall to use in the same way you would put your earnings to use. This way, you ensure you get the best from your money.
1. Money should never be segregated
Money is money. Do not segregate it based on where it comes from.
Just because you get it unexpectedly or without working for it, don't undervalue or undermine its worth.
It could be an inheritance, a gift from a rich relative, a bonus you were not expecting, a tax refund or even a lottery. Or you may have won it in a television game/ reality show. In Navroze's case, it was his stock market earnings.
2. Do not take a risk with the entire amount
Whatever be the profit or windfall, do not gamble or spend it all.
Navroze told me he made Rs 5 lakh by selling his shares. He now wants to reinvest the entire amount.
If I was in his place, I would reinvest only around Rs 3 lakh in shares.
The balance Rs 2 lakh would have been channelised into a 'safe' option such as post office deposits, National Savings Certificate or bonds from certain financial institutions. So, even if I make a loss on the Rs 3 lakh, I still have Rs 2 lakh safely tucked away, though the return is not high.
3. Play safe with the entire amount
Some might feel -- why take a chance with that money at all? Play around with the small amounts you demarcate from your salary. But don't play around with this gift that has landed in your lap.
If that is your way of thinking, you should put the entire amount in your Public Provident Account. Or take out an insurance policy (for which you pay the entire premium at one go). Or buy National Savings Certificate.
If one needs a monthly income, look at a post office Monthly Income Scheme. This is a regular fixed deposit which gives monthly returns.
4. Look at settling your debt
You could also spend your windfall clearing your debt.
Servicing a personal loan or credit card debt is very, very expensive. The rates of interest are in the 18% to 30% category.
It would be better to clear the loans so that you don't spend any more of your money in paying off this massive interest.
5. Look for expenses that have been put on hold
I don't mean going shopping or eating out at swank restaurants every night. Have you been genuinely saving for something? Like a home theatre system? Or a renovation of your home? Or are you saving for the down payment of your home loan? Use this money for it.
Of course, you could do none of the above and take a chance and reinvest the entire amount in shares, hoping it will double in six months. Then buy what you want with it. But you might end up dejected like the young groom.
The point I am trying to make is that, whichever way it lands up, money is money. Act wisely. Don't do anything rash that you will regret later.
Despite what Navroze says, I am sure he will reminisce a lot about what he could have done with Rs 5 lakh, should he lose it.
In the meanwhile, he is spending all his free time looking for 'good' stocks.
Illustration: Uttam Ghosh
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