Sunday, March 9, 2014

Sunday musings: the Art of Philosophical Investments

As per Wikipedia: Philosophy is the study of general and fundamental problems, such as those connected with reality, existence, knowledge, values, reason, mind, and language. Philosophy is distinguished from other ways of addressing such problems by its critical, generally systematic approach and its reliance on rational argument. In more casual speech, by extension, "philosophy" can refer to "the most basic beliefs, concepts, and attitudes of an individual or group".

By logical extension, “Philosophical Investments” can refer to basic beliefs, concepts and attitudes of an investor towards investments. So, where is the ‘art’ in it? The ‘art’ is in introspecting and analysing your own beliefs, concepts and attitudes towards investments to understand whether you are proceeding along the right path towards building long-term wealth.

A favourite book during my early school days was an abridged edition of the epic “Mahabharata”. The trials and tribulations of the ‘good’ and the relative prosperity of the ‘evil’ are reflected in modern day life as well. The fascination with the epic story continued as I grew older – and had a significant influence over my own beliefs and attitudes.

A couple of questions that bothered me were: Why didn’t Sri Krishna – who is supposed to be an incarnation of God – give his good advice to Duryodhana? Wouldn’t it have prevented the great war at Kurukshetra that decimated both sides?

Turns out Sri Krishna did try to drill some sense into Duryodhana’s brain, but was stumped by Duryodhana’s response, which went somewhat along the following lines: “You don’t need to preach to me about ‘good’ and ‘evil’. I understand the difference. But I have a problem. Despite knowing what is ‘evil’, I have this uncontrollable urge to do ‘evil’ things.”

There is a Duryodhana latent in all of us. We wouldn’t be human otherwise. Why else would we hang on to a stock that is falling like a stone in the hope of getting back our break-even price? Or, enter into an F&O contract just to make some quick profits without knowing the first thing about how to set a stop-loss? Or, buy a stock simply on the recommendation of a friend or an expert without making proper financial and asset allocation plans?

The question you need to ask yourself before you invest a single Rupee is this: Am I in it for the long-term, or am I looking for some easy money and cheap thrills?

If you are serious about long-term wealth building, read investment books, talk to experienced investors and make proper financial and asset allocation plans before jumping into the stock market.

For easy money and cheap thrills, you can always play ‘teen patti’ with your friends on weekends. It will be more enjoyable and you will lose a lot less money.

("The battlefield of Kurukshetra only provides the occasion for the dialogue between Arjuna and Krishna. The real Kurukshetra is the human heart…" ~ M. K. Gandhi)

1 comment:

Eswar Santhosh said...

I just completed a decade in the stock markets. When you spend so much time in a field, you are supposed to know something. But as time passes, I only realize how little I actually know.

The changes I have made over these years.

i) I have a budget (a cash flow sheet with planned expenses), portfolio (tracking all my transactions over the past decade + computation of actual returns as an effective counter to what I 'feel' I am making) and an asset allocation sheet (updated continuously, but only acted on when needed).

ii) I regard money not as an end-goal, but as an interesting by product of the process I am trying to follow. I am not understating it's value. After all, I would rather have a little more than what I need than even a paisa less. But, I have a feeling that if I have a proper method, money will follow.

iii) By measuring actual performance at the portfolio level, I have learned more about proper capital allocation. When a stock with 0.5% allocation goes up 100%, it adds only as much as a stock with 10% allocation going up 5%. I am still trying to strike a proper balance between my perception of risk in the stock, too much allocation and too less allocation.

iv) By following a process which is simple - getting interested in a stock only when it enters a buy or sell range, I spend less time watching the markets. I do update my portfolio sheet every day. But, if you split my years into two halves (2004-08, 2009-13) and compare them, I have cut my trading days to half, portfolio churn ratio to less than half and have doubled my (time weighted) returns.

v) Rather than focus on what I paid, I am trying to get used to the current market value. This applies in both cases. Whether a stock has doubled or halved from my purchase price, what is important is what it is going to do over the next 2-3 years. Earlier, I focused too much on what I paid, thus drawing false comfort in some cases and blind averaging in others. I can't say I have been completely successful, but my sheet is designed in such a way that it helps me focus more on current market value than my cost.

vi) Earlier, I used to think about next week or may be next month. I have slowly come to focus on the long term. I attempt to make plans for the next five years. A large plan is nothing but a series of small steps. My current plan for 2014-18 involves adding more checks - behavioral and analytical - to my stock selection and portfolio maintenance. I hope to learn within the first two and hope to look back at the data after five years to analyze where I have done well or have gone wrong.

vii) What I have learned is that learning never ends. You just finish one level to start fresh in another. It is this aspect which interests me about the markets. Of course, the other endearing reason is that I can remain really, really lazy unless I want to act, which really suits me well :)