Investing is a Plan, Not a Product
Let's say you plan to invest in real estate. When you finalize on one piece of property, you also finalize factors like- How much are you willing to pay?
- Would you buy the property right now?
- What is the exit strategy (holding long term or sell in 6 months?)
- Does the investment fit in with your overall plan/goal?
It took me a while to get this, but it is really empowering to understand this principle. It is wise to divide investing in 3 plans.
- Plan to be Secure
- Plan to be Comfortable
- Plan to be Rich
Plan to be Secure
Buy a big term insurance policy and don't look at market linked insurance plans (ULIPs). Set aside some money and trust that your financial planner will do a good job with it. Also, set aside some money (3 month's salary) as an emergency fund. Once you set this up, this should be an automatic plan that doesn't require your time or effort.Everyone should have a plan to be secure.
Now, before going to the second or third plans, ask yourself this question.
Do I want to be comfortable or do I want to be rich??
This is a very important question as it will probably determine what you do while following your plan. It's similar to setting up your goal before buying a gym membership. You may choose to have a light jog on the treadmill, or work out heavily with weights. You choose what you do.
Also Read: 10 Ways to become Successful in Stock Market Investment
Now read on, I hope after reading you will make a more informed decision about which plan is right for you.
Plan to be Comfortable
The plan to be comfortable should be pretty straightforward for everyone. If you are a salaried personnel, then you save a portion of your income. You use 80c to minimize your taxes, invest in diversified mutual funds, SIPs, or recently infrastructure bonds, or specific stocks if you have a good education.You also have a financial planner who can give you advice for specific funds, or who can tell you to rupee cost average your investment. You also make some money of "hot tips".
If you follow this plan, you should live and retire comfortably. There is nothing bad/wrong about choosing this plan, just as there is nothing wrong with going to the gym for a mild jog. It's an individual choice.
Most individuals would find themselves in the comfortable zone. I encourage all of those people to read further as well.
Plan to be Rich
Extracted from a book:Q: "What's your advice for the average investor??"
A: "Don't be average"
Why? Because the average investor is a slave to the market. Average investors make money when the market goes up and lose it when the market goes down. Average stock traders don't make money. (They don't lose, but don't make it either) When the market crashes, the average investor loses the maximum.
So let me tell you a secret about investing.
Successful investing is not about the investment, it's about the investor.
This is perhaps the least understood concept of investing. This is the reason why people ask questions like "Where should I invest my money?" and the most accurate answer to the question is the question
"I don't know, are you a good investor?"
Let me give you an example.
What happened during 2008-2010 in stocks worldwide? Everyone knows they crashed right? Everyone who was invested in stocks lost money right??
WRONG!
John Paulson, a hedge fund manager, made more than 15 Billion $ for his company in 2007. (That's a billion with a B). That money is almost equal to 80,000 crores.
Hedge-Fund Manager John Paulson's Greatest Trade Ever
Many claim that he made around 4-5 Billion Dollars of personal money during (2007-2010). That's more than 20,000 crore rupees.
While this was claimed the greatest trade ever, the point I am making is that it is entirely possible to make money when the market is going up and down.
Also Read: 6 Financial Habits of Rich People
So what are the differences between average and rich (above average) investors? Simply stating, successful investors have 3 E's that average investors don't have.
- Education
- Experience
- Excessive Cash
Education
A successful education starts with a good mindset. A successful investor has much more education than the average investor. A successful investor is committed to getting better and better with their education.How do you define commitment?
Do you know that friend of yours who plays the guitar? Do you know how do they play the guitar so well?
The reason is their commitment to playing.
So how is the mindset of a successful investor different from an average investor? Let me draw a diagram to better explain.
In the world of business, there are 4 kinds of people:
- Employees
- Self Employed
- Business Owners
- Investors
Does that make a lot of difference, you may ask? The answer is yes.
Let me put forward a few myth busters to put it in perspective.
(Avg Investor): My house is my biggest investment.
(Rich Investor): A house is a liability
(Avg Investor): Diversification reduces risk
(Rich Investor): Diversification is de-worsify-cation (Warren Buffett quotes)
(Avg Investor): Stock market is risky
(Rich Investor): Risk comes from not knowing what you are doing
(Avg Investor): Avoid risk
(Rich Investor): Take more control and manage risk
(Avg Investor): Mutual funds are good investments
(Rich Investor): Mutual funds are good investments when you sell them (That is why big companies sell mutual funds)
If you think mutual funds are not risky, try going to a bank and ask for a loan to buy mutual funds, you'll be laughed out.
(Avg Investor): Real estate never comes down (extremely popular in India)
(Rich Investor): All markets go up and down
(Avg Investor): Saving money is good
(Rich Investor): Saving money pays maximum ~8% before tax, inflation is ~10%, so saving money is a guaranteed loss. (Inflation India 2012)
I could go on, but hopefully you get the point.
I am not saying what the average investor is saying above is bad advice, but it is average advice. As I mentioned, average investors make money when the market goes up and lose it when the market goes down. And if you have been reading till here, then you might be interested in making money whether the market goes up, down or sideways.
Also, if you find yourself arguing against the Rich Investor statements, that means you too are thinking from a average investor perspective.
So, how do I educate myself for being a rich investor?
- Books
- Tapes
- Workshops
- Mentors
In case you are wondering, then investing is a subject that you may never be perfect in. Just like there is no perfect batsmen in cricket (everybody gets out), there is no perfect investor. But the more education you have, the better your chances are.
Experience
How do you get experience? By applying what you learn. Start small as mistakes will happen. If you stay on track it will become easier and easier. It might feel like trying to eat with your opposite hand. In the beginning, you will spill your food, you will be frustrated and probably won't be satisfied, but in time you will learn it eventually.Excessive Cash
This is the tricky part, but if you have educated yourself well, and have gained good experience, then excessive cash (or some cash) should already be rolling.A note on the ultra rich The rich investors invest in assets (stocks, bonds), but what do the ultra rich invest in?
The ultra rich don't buy assets, they create assets. This is the secret how the richest people in the world created their wealth. They created an asset which millions and millions of people want to buy. Bill Gates created Microsoft, Larry Ellison created Oracle, Warren Buffet created Berkshire Hathaway.
Knowledge Begins with Words
What does that mean? Let's take an example. Many times when you travel, you meet people or are around strangers and you hear them talk. Most of the time you can guess their professions. Have you wondered how?It's by the words they choose and say.
- I evaluated the students and the grades are good.(Teacher)
- My boss is not a good person.(employee)
- I shorted that stock as the P/E ratio was high.(stock market trader)
- That patient had to be given a muscle relaxant.(Doctor or medical professional)
So tell me if you understand any of these words.
- P/E ratio
- Volatility
- Bull Market
- Bear Market
- CAGR
- Y-o-Y growth
How?
You can follow this blog. Moreover, Read your business newspaper. Listen to the market news. Use Google.
Also Read: P/E Multiple and Two Common Misconceptions
Psssttt!! Let me tell you a secret. Most of these complex sounding words are actually simple concepts.
Really???
So why do all these finance companies and news channels use these fancy titles and words?
Cause they want to sound smart, and want to sell you stuff.
Do you know that most mutual funds don't outperform the market over the long term. (What that means that 6 year old niece can invest in the market and perform better that most mutual funds)
Do you know that mutual funds are one of the riskiest investments you can make. (You put up all the money, take all the risk and don't get 100% of returns)
Diversifying mutual funds is like taking multiple brands of multi vitamins. (No good end result)
So when you start learning words, you'll understand the bullshit most TV channels and financial advisers preach as "investment advice" is really sugar coated salesmanship.
So when the next time you read an investment advice column and say, "That's nonsense", Congratulations, you are making progress.
Don't get me wrong, mutual funds aren't bad. They are average investments for average investors. And as we know, average investors make money when the market goes up and lose money when the market goes down.
But if you are reading this, that means you don't want to be average.
So I encourage you to take the next step in your education and start learning words. I'll try to help as much as I can.
Have Happy Investing!
