It is said that Emperor Akbar once demanded of a chief minister that he come up with something to change his mood. If the emperor was sad, he should be made to feel happy and if he was happy, he should be make to feel sombre again.
The deadline: One week, or severe punishment.
With this impossible task at hand, the minister approached Birbal, known for his wisdom and wittiness. Birbal smiled and told him not to lose heart -- after all, they had a week to think up of something.
Finally, D-day arrived with no remedy in sight. Emperor Akbar summoned his minister who approached with dread (the emperor's wrath was well known).
On the way, Birbal slipped a piece of paper into the minister's hands and told him to present it to the emperor. Totally clueless, the minister did as told. On reading the chit of paper, the emperor's face lit up and the minister was congratulated.
The words on the paper: 'This too shall pass.'
Well, this ancient bit of wisdom is certainly apt in today's market scenario.
Think about it. The market was on a steady upturn. The great India growth story, strong corporate earnings, and a fundamentally strong economy kept the foreing institutional investors begging for more.
Within a week, the market takes a downturn and all these factors are forgotten. The FIIs suddenly have had enough, metal prices have fallen, US interest rates are rising and the Central Board of Direct Taxes comes out with a circular that no one really knows much about but still condemns it as a catalysing factor.
Sure. We all scout around for reasons to explain every phenomenon. However, I cannot help but feel that generally folks aren't having a fix on the course of the market.
Making money is not rocket science! Here are two principles you must follow:
1. Don't join the party!
Actually, making money in the market is simple --- buy low, sell high. However, as straightforward as this may sound, I know from personal experience that it is one of the most difficult things to do. For the simple reason that this goes against basic human instinct.
When the good times are rolling and the indices steadily creep upward (as they were sometime back), the first impulse is to try and join the party. So you go and shop around for shares.
And the first part of the above rule is flouted.
Eventually, the inevitable happens when the Bull Run ends and the valuations cool down. Panic sets in and shares are sold in a hurry. There goes the second part.
In the end what happens is that one ends up doing just the opposite --- buying high and selling low.
And history keeps repeating itself till one makes a conscious effort to come out of it. And that requires courage and, more importantly, the conviction of buying low and selling high.
Know this much -- five years down the road, only the smart investors who are actually buying in the market currently, will be smiling. Don't take my word for it -- take history's.
2. You need to hold on!
Forgive me if I appear condescending, but I have made the same mistake. When I was a student, I made my very first investment: a Recurring Deposit of Rs 800 in a bank across the road.
I have fond recollections as it was a graduation of sorts from the piggy bank at home. I convinced my parents (as only a child can) to add Rs 200 to my princely capital every month.
Looking back, the RD proved to be a great investment. Though the capital was nothing that would make a Donald Trump look over his shoulders, the entire process, perhaps, instilled a sense of savings discipline at an early age.
Not to mention the fact that I could use the money to make my very first foray into the stock market. . . 100 shares in a well-known scrip was my first stock investment.
And that is where I made my first mistake as a novice investor: I got out of the stock way too early. The moment the price went up slightly, I sold. Had I held on, perhaps Trump would really have looked over his shoulders!
Anyway, jokes apart, my message is that investing (whether in debt or in equity) is all about the long-term, for that is when the power of compounding really works.
Coming in and getting out frequently hampers the journey -- for when it comes to investments, it's the journey that is more exciting and thrilling than the final destination.
Sandeep Shanbhag is the Director of A N Shanbhag NR Group, a Mumbai based tax and investment advisory firm. He may be reached at sandeep.shanbhag@gmail.com.
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