Investment Myths

 One needs to be stock picker

Saving is key

 Success is not about taking that bold step in the future, it is about taking the small steps now.

Saving is probably one of the most important habits in life. This is the first step towards your long term financial security and ultimately your financial independence. There is no substitute for saving. And hence the moot question. How much of what you earn gets saved?

I often hear people say that they cannot manage to save by the time the month ends. And this may be true in some cases. But in my experience, most of us can save a part of our earnings. While the size of our savings has a huge impact in the long term, the first step is to be aware of and having that intent to save.  Getting into the habit of saving and a mindset of saving is a very important first step. 

The early years need to be focused on building an initial corpus. One needs to build a sizable base as quickly as possible as this is important for the magic of compounding to kick in. Read about the importance of size in my previous post Size Matters. Hence developing a saving habit is very important. Just like your health, your financial health is dependent on the daily decisions that you make everyday. 

Here are a few ideas that will get you started on your journey towards financial security.

1. Set a budget: Setting up a budget is the most important start. Setting up a budget does not necessarily mean being stingy or depriving yourself. The process of budgeting makes you aware of the various things you spend your money on. It allows you to prioritize the important stuff and may be leave out the not so important stuff. How much do you plan to spend on rent? How much of your earning is allocated to groceries? And that most important question. How much of your earning do you intend to save at the end of the month?  Set up your goal for saving. Don't stretch yourself too much as setting unrealistic objectives will get you off the rails before you have even started. Setting up a fair and realistic goal is extremely important for a sustainable budget. Getting into a saving habit is much easier than you think and setting up a budget is a great way to get started.

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2. Spend less : Spending less does not need to be a negative thing. You need to decide which expenses are important and which are not. You can still go ahead and buy something that makes you feel good. But among the many things that you buy everyday, you will find opportunities to eliminate many items from your shopping list. You will be surprised about how many items you will be able to eliminate from your monthly list once you get into the mindset of saving. Shopping around is also a great way to cut down on your spending. While you may have set a reasonable budget for your groceries, check for prices and value across the supermarkets and brands. You will discover new stores and brands that provide a better value and cost significantly less. 

3. Separate your savings: Often we find that moving the targeted savings amount out of the current account is a great way to build the discipline. Right upfront, move your targeted savings amount to a new bank account. As soon as the salary gets credited to your account, transfer your planned savings to a separate account. Once it moves out of your salary account it is likely to remain safe and out of reach.

4. Avoid debt: We all fancy the luxuries of life. If you can't afford to buy them with cash, you can't afford them. Never ever take a loan for depreciating assets. Like a car or the new TV. A loan is a sure way to disrupt your savings process. Aside from this, debt have several others risks associated with it. It is prudent to avoid all debt in the early years.

5. Set up an SIP: An SIP ( systematic investment plan) is an automated process of investing your savings on a periodic basis. I personally love the concept of an SIP and have used it extensively. you can set up a process of automatically investing a fixed amount into any mutual fund of your choice.  Watch my video about the process of SIP here

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How not to invest

 A lot is said about how to invest. We spend a lot of time trying to become the next Warren Buffett, trying to identify the next multi bagger. I know of a lot of folks who brag about their investment ideas. But to become a good investor, the first gate one needs to cross to know how not to invest. 

In a game of cricket, the real stuff happens on the pitch. And in the dressing rooms. What really matters is the strategy the team has in mind, the batting line up, the bowling statistics etc. And yet the focus often remains on the cheerleaders. They are nice to look at. The draw a lot of attention. At the end of each over, they dominate the screens. And yet they have no impact on the final outcome. Investing is a lot like that. 

Imagine there is a hardware shop in the village that has been operating for a few years and is now on sale. Would you buy the shop only based on the village gossip? And if you did decide to go ahead with the purchase, how much would you pay? Would you want to know how many customers it serves? Would you not want to know how much profit it makes? Or may be it is running losses? 

Would you go ahead merely based on the fact that he has a good looking daughter?  That is what is referred to as hype. Often people depend on the hype while taking investment decisions. With little reference to business fundamentals. Just like a game of cricket, the cheerleaders don't matter. They have no impact on the final result of the match. Remain focused on the game.

Before you invest ask questions about the business. In a sense buying a share of a company is like buying a small part of the hardware shop. Find out if the company is making profits. How consistently has it made profits over the last few years. What does the future hold? Is the company's future protected? How efficiently is it run? How good are the returns on the capital it has deployed? What is the company's position in the industry it operates in? Is there any risk to the company's business in the future?

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This post is not about what to do. It is about what not to do. Don't make decisions based on a random comment or hype. Do research. Understand the company, Understand the industry. Look for signals about the company's future profits.

In the end the cheerleaders don't have any impact on the final outcome of the match