Know Your Limitations

It is a fact proven by data that 90% of people in the stock market loose money. It is also a fact that so many of us loose so much money with in one year of entering the stock market that they swear not to enter it again.

And yet we have so many new comers in the market year after year.

You know why?

As they enter the market and see that 90% don’t do well at all, they immediately jump to conclusion that they are the 10%. The list of such people is getting longer by the day and so is the list of people who loose money.

What makes you think that you would do well in the stock market? I assume that you have a corpus earned from your business or profession that you want to invest in the market. This means that you have done well in your field to earn that corpus. So why don’t you continue the same path and earn more riches from your profession or business. Why do you want to risk your hard earned money in stock market.

You hear stories about Warren Buffett, Charlie Munger, Templeton, Martin J Ping, Fisher, Jhunjhunwala and so on. How they made immense amount of money in the stock market. True that. But if you read the biographies of such people you will know that it took them years to perfect their art and down the line they too committed very expensive mistakes. They could survive as they were exceptionally intelligent and hard working. They had the ability to accumulate and analyse large volumes of data, an ability which even Nobel award winning economics professor don’t have.

You know how the current American President invests his money. You know how the most likely future president Hillary Clinton invests her money. I know this as this data is in public domain as required by American Law. You know what advise Warren Buffett has given to his wife to invest her money if he is no more.

It is the low cost index fund, VANGUARD.

The most important thing people need to know in making this decision is their own limitations.

The Indian equivalent is IDFC and HDFC index funds and ETF(s) like NIFTYBEES, BANKBEES, SBI ETF(s)….

Being an active investor and somehow outperforming the market by picking individual stocks like Page Industries sounds good, but the catch is that being a successful active investor requires a massive amount of time and work. If you don’t enjoy it, why do it?

Being in this trade you meet all sorts of people. Some would say that they are willing to put in any amount of effort to research, analyze to pick the winning stocks. I have seen that this zeal and eagerness wears off soon as they were in it only for money. In this trade no amount of learning is enough. Earning will come as a by product of a learning process that could take years.

Also you come across people who say that they have done well in the stock market. When you ask them for the proof of capital gains over the years to calculate the CAGR, they draw a blank.

An active investor who does not keep written track of their results after fees and expenses and compares that to “being the market” instead is at big risk of fooling themselves. “The easiest person to fool is yourself”, says me.

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