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Thursday, February 17, 2011

Become a better investor by learning how to swim

There is an old English idiom: Birds of a feather flock together. But the stock market is populated by strange birds that care two hoots about English. They prefer to follow the laws of physics – particularly the one that states: likes repel and unlikes attract.

So we have a variety of investors who are polar opposites – bulls and bears, active investors and passive investors, long-term investors and short-term traders, growth investors and value investors, those who trade on margin money and those who invest their savings, investors who try to make money and investors who try to build wealth. And all these opposites get attracted to the same market place, and think that their ideas are the best!

But the two types of investors that really matter – and needless to say that they are also polar opposites – are those who know what they are doing and those who don’t. The old pros and the babes in the woods. The ‘smart money’ and retail. It is not a level playing field. The scales are heavily weighted in favour of those who know what they are doing.

It is a chicken and egg situation for the new investor. How can you learn to swim if you are afraid to get into the water? But if you jump in before learning to swim, you might drown. Is there a way out? Fortunately, there is.

I learned to swim by myself by thrashing around near the bank of a pond. A lot of water got inside my lungs, nose and ears – and it wasn’t a pleasant experience at all. But I persisted and learned to do the ‘dog paddle’.

Eventually, I had to seek help from an expert swimmer – to learn proper swimming strokes and breathing techniques. I am not a pro, but consider myself an expert swimmer. Still, I’m very wary of diving into a fast-flowing river or a rough sea – because I don’t have sufficient experience of swimming under those adverse conditions.

Will you jump into the sea without any fear if you find yourself facing a barrage of 10 feet high waves? If yes, will you also be able to fend off a shark attack? The stock market is like a rough sea. The sharks are the old pros out to feed on young fish like you. Why become some one’s dinner?

Start learning to swim at the shallow end of the pool by investing in a bank recurring deposit and an index fund. After you have built up a corpus, take the help of an expert swimmer to understand financial planning and asset allocation, fundamental analysis and technical analysis. Only then should you venture out to sea.

3 comments:

Nasir Khambatta said...

This was an excellent analogy, Shubankar. Thanks

Subhankar said...

Appreciate your comment, Nasir.

Wish more young investors would learn the basics before diving into the stock market.

Andrew McGill said...

Saving money is related in planning your good investment.. that's why one must be prepared of what he may encounter.. so tips of saving money could also mean of a good thinking. Hope to read more your post about how to become an investor.

Anyway, thanks for sharing your thoughts with us about this. I really appreciate it.

Looking for your more post. Good Luck and keep up the good work =)