The General Theory Of Investing

The general theory of investing is quite simple and exhibited by people in everything. We generally want to buy good things at good prices and sell things at a profit which means making it for less and selling it for more. This is true unless you are someone who wants to have snob value attached to things like some of the super rich people who are probably less than 1% of the world wide population.

The central idea to investing is forfeiting today’s fun/joy and delaying it for the future in the hope that it helps to get greater returns or atleast safeguard us in the rainy days.

The stories are many and advice are plenty in today’s fast paced well connected internet world. Just scan through and you will have best real estate investments, best shares to pick, best SIP to put your money, best mutual fund to buy, best bonds to put your money into and what not.

In my own way I was trying to get a better view of all this.In doing so I  read  couple of books Graham’s “Intelligent Investor” supposedly mentor to super investors like Warren Buffet and Taleb’s “Fooled By Randomness”. Both these books are very different take on investing, success and life.

There are few points that I have taken my key takeaways

  • Always avoid herd mentality – Its human nature to value things more when other also believe in it. Bullish/Bearish markets are great example of this. Investors are carried away and they keep buying in a bullish market believing that markets are going to raise and raise. Companies are valued not based on their balance sheet/earning rather on the future prospects making them too expensive but people keep buying the over priced shares contributing to the herd behavior.
  •  Do not believe in statistics completely – Mathematics/Statistics  has been used in Economics in order to derive results based on data. There are multiple theories with the mathematical/probabilistic explanations based on which the decisions are made.Many of these theories are pseudoscience with most of the investors having limited understanding. So relying completely on statistics to make decisions on investing without understanding the background can be dangerous.
  • Be wary of expert opinions –  The “experts” in the field of investment keep on changing very frequently. Many of traders who were very successful at a certain point of time go bust and new league joins. The journalists of which most of them are trained in expressing things in a great way but they don’t tend to get what and how investment needs to be done. So always be wary, what has worked earlier may not work in future. A trader with very impressive past may blowup in the next ups and downs of the market.
  • Have realistic expectation from the investment – Take any investment and have realistic expectation. If someone says that the investment is definitely going to give unheard returns, then be sure there is something fishy. Anything beyond bank interest rates + 5% is great and isn’t very easy to repeat year after year. Anyone who claims to give returns of  50%, 100% or so are actually like getting you into lottery. I am not denying that nobody makes such returns but you cannot be certain about it and it cannot be repeated every year. If you are investing in something like that, keep in mind that you can as well lose everything.

I may be sounding a scumbag who is very skeptical about the whole situation. Its just that make your own decisions and do some thinking. If you want to put your money in a company whose price to earnings ratio is 500, its your choice. If you want to buy a flat for 1.5 Crore thinking of a great investment, think through.

Sometimes running against the herd is good. Its will never be easy but in the end it will be probably worth the struggle.

I think whatever I have put here is common sense and hopefully helps me as well others to take investment decisions in a better way.

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