by Raunak Onkar
Buying & Selling stocks has become very easy if you have the right pieces of paper attesting who you are & where you live. You can buy a stock in the morning & sell it off the same day without feeling anything about having bought or having sold it. It would be a long forgotten transaction a week from then. With trading stocks so easily, is it possible that it has eroded our sense of entitlement or ownership in these stocks?
When we buy a stock in any company, it is not just a piece of paper or bits on the screen. It is a part ownership in the business whose market value is represented by that one share. It also represents something else. It represents a right to vote & a right to exercise our opinion to the extent of our ownership. So in short, it doesn’t matter if you own a single share or if you own a lac shares. You have the same right to be represented as any other shareholder of that business.
The sense of ownership in any business can come through many ways. One is to actually start the business. When you start a business, there is an automatic responsibility to make the business a success. You find ways to make sure that the business does what it has set out to do. You hire more people & bring them into your vision to expand the scope of your small idea. Eventually the idea either grows or perishes. But at least you have that sense of ownership & ‘control’ over the outcome of that business.
When a lot of people first start to read & learn about investing they invariably end up reading about Warren Buffett in their first few weeks of reading. From there onwards begins this fairy tale dream ride into the idea that someday they can also invest like Warren Buffett. The next automatic step that people tend to take is to read what any other fund manager worth their salt has to say about Warren Buffett. To remind you, at this point there is not a single rupee invested by this person, ever in his life (apart from may be the automated Fixed Deposit certificates & PPF investments).
After having read & being enamoured with Warren B’s performance & his dazzlingly simple explanations of how he analyses businesses, people start with the notion that investing is an easy affair. By this time, the activity of really sitting through an entire market cycle not being able to find great investment opportunities or even spending huge amounts of time & effort in researching industries & their managers has never happened to them.
The problem with a beginner learning to invest is that we tend to immediately get sucked into the investing blog world. In this world, a lot of people are strikingly original in researching their own ideas while a lot are “me too” people who are constantly following what other smart fund managers are doing. Not enough effort is spent to understand why investing is important & what are their unique needs to invest. People rarely do any cash flow analysis of their own life & are massively unaware of their own patterns of spending & making money. People automatically assume (especially salaried people) that they will somehow have enough money by the end of the year to put into some tax saving mutual fund & not to forget the mammoth 8% “tax-free” compounder of public savings – The Public Provident Fund.
Any person who wishes to take charge of their investments & wants to compound their savings at a rate of at least 5% more than the fixed deposit rate has no other legal option but to invest in Stocks.
Anyone who has played the game of chess for a fairly long time can understand the idea of ‘chunking’. Chunking, for the rest of us novices, is the ability of a seasoned chess player to identify moves or a pattern of moves within a game. This pattern recognition works like a filter in which they sort the good moves from the bad moves. This can make the difference between winning or losing the game.
So what does a novice chess player do exactly? The novice for lack of such pattern knowledge, tries to brute force his way till the end of the game. That means, the novice constantly uses trial & error to figure out which move to make. Basically trying to think ahead a few moves. This system has a very low rate of success, which is obvious because if pit against a master chess player the novice will be led into a pattern which is most favorable to the seasoned player. This will happen without the novice knowing anything of such a strategy. In fact an interesting thing to observe is that when two novice players play chess, they invariably play in a very random manner. There is no pattern to their movements & they eventually end up winning or losing merely because the game ends. But the clincher is not how many moves ahead we must see to win the game, but how many moves we can match in a pattern of good moves & bad moves. Continue reading