Saturday, 27 May 2017

How to Be Greedy in the Stock Market and Still Win

Recently while I was talking to a colleague about a promising stock, he told me the story of the greedy dog. Once upon a time a dog was passing through a narrow bridge over a stream. He had a bone in his mouth. As he looked down, he saw his own image in the water. But he felt that it was another dog with a bone in his mouth. In order to get the bone from the “other” dog, he started to bark. As soon as he opened his mouth, the bone fell out of his mouth and into the water. The dog regretted his foolishness.

With this story, my colleague wanted to give the message that one should be contented with what one has and should not be greedy. So he turned down the idea of buying the stock I was talking about.
There is a general and a specific lesson in this anecdote. The general lesson is to avoid analogies. Those who take help of analogies to explain their point are just twisting the facts to suit their own case. Just because the dog lost its bone doesn’t mean that you have to be satisfied with what you have. What the dog did is the dog’s problem, not yours. 

The specific lesson is regarding “greed” in the stock market. Many investors attribute their stock returns to luck. Others are content with small returns and consider waiting for higher returns as being greedy. The person whom I talked about earlier considered investing in the stock as being greedy. All in all, the idea of greed is highly misunderstood in the context of the stock market.

In the stock market, it’s perfectly okay to hold onto a good stock for long times in anticipation of higher returns. That’s not greed. Indeed, you find multibaggers only when you are invested in a company for long durations of time and refuse to sell your stock prematurely. Similarly, while luck does play a part in almost anything in life, it’s not just luck that makes you successful with stocks. You need to do much more than simply rely on luck to get successful in the stock market. Finally, exploring new ideas and opportunities is the basic requisite for progress. It has nothing to do with greed. All that the stock investor needs to be careful of is being optimistic without any basis. That’s greed.

Friday, 12 May 2017

Silly Things People Say about Money #2

When a person told me this, I first felt that she was kidding me: “I want to get into debt so that I can build a good credit history.” Later I realized that she was indeed serious. I got to hear a similar thing from a couple of more people. I was astonished at their idea of financial prudence.

The last decade has seen the rise of the financial-planning industry and its associated caprice. There is at least one company that rates you on your credit worthiness. Many people are eager to maintain a good credit score so that they can easily get into more debt. Recently a salesman asked me if I used a credit card and hence if I had a credit history. I don’t use a credit card.

Should you worry about your “credit history”? Absolutely, you should. But not because you need a good “credit score.” If you have borrowed money, you must honor your commitment and pay the money back. That goes without saying. What is even more important is that you cultivate good financial habits. Being financially strong is more important than worrying about credit history.

How do you become financially strong? By following the old, common-sense principles of money. Save more. Control your expenses like crazy. Avoid debt. Learn about business and investing. Invest more. Reinvest the profits. Keep repeating the process.

Sounds boring, isn’t it? The most effective things are also the simplest. There is nothing thrilling about them. Those who follow the traditional financial wisdom don’t have to worry about their credit history. They can buy anything anytime without getting into debt. Actually, they are the ideal customers for any business, given their financial might.

The only purpose your focus on credit profile serves is that it reminds you that you are focusing on just the wrong thing.