A few basic investing principles

Investment

oi-Sunil

By Sunil Fernandes

Published: Wednesday, December 11, 2013, 8:48 [IST]

"I am the wisest man alive, for I know one thing, and that is that I know nothing." If this self-assessment by Plato is true then there is no reason for investors to ignore this philosophy. Knowing what you don't know is a key to success in the field of finance and investment. The best way to learn investing is to start listing down the things you don't know about investing.

To know that you don't know is better than knowing something to be true but which in actuality is not so. In the words of Amos Tversky -"It's frightening to think that you might not know something, but more frightening to think that, by and large, the world is run by people who have faith that they know exactly what is going on."

Learn the basics of investing: 4 dimensions of Investment Knowledge

You can lean the basics of investing by understanding the 4 dimensions of investment knowledge. Investment knowledge vis-à-vis a person can have four dimensions- a person knows something about investing, he may also know that he does not know certain things about investing; he might not be aware that he knows something about investing or he may be unaware about things that he does not know.

Focussing on areas that we do not know about investing and trying to gather information, about them is a good exercise, it helps in"knowing the knowable" leading us to take charge of situations by "controlling the controllable."

Learn Investing through the cautious optimism approach:

"Cautious Optimism" is perhaps the best way to approach the subject of investment and arriving at related decisions. A healthy way to an informed decision making process is through "informative debates" which can stimulate the thought process in light of all available information.

Learn investing through the threadbare approach:

A threadbare approach, where each element about investing is taken apart and carefully weighed is the essence of sound investment decisions. For every aspect of the investment, there remain a few elements which are unknown and perhaps there is no way to know about them beforehand. The same amount of caution needs to be adopted in such investment situations as that of an alert driver, driving through a highway on a foggy morning.

Learn investing through the logical approach:

Many a times we wish that certain things on our investment, happen in a certain manner and this is based on our perceptions and understandings. However the actual outcomes do not vindicate such a wish-list. Investors need to appreciate the fact that there is a distinction between probability and actual outcomes. Not discerning the difference can lead to problems. Adhering to Warren Buffet's advice of- sticking to core competencies for best results is the most logical approach in such situations.

Learn investing by understanding which group you are in

Investors belong to two classes, one feels that they know everything while the other is more circumspect and would prefer to say "I do not know" more often. There are various sub-categories of the first class of people. Some of the characteristics of this class can be enumerated below:
I. Success in investments is attributable to the knowledge gained about economic direction, interest rates, markets and widely followed stocks as per these investors

II. They have an air of confidence and faith in their abilities to believe that they can achieve success.

III. They are aware that not everyone is successful by following this dictum but they feel that they belong to the successful lot

IV. They depend on forecasts about the future while making an investment decision and also are happy to give their opinion regarding the future to other people.

V. They rarely make an objective assessment of their records as assessment makers
Contrary to this, those who belong to the ‘I do not know' class, seek to be guided differently and will give this response to everyone concerned.

Mark Twain very aptly says "It ain't what you don't know that gets you into trouble. It is what you know that just ain't so."

How to learn investing by understanding ‘how not to invest'?

"Look before you leap" is a sound investment advice which wise men expect investors to remember. All of us know this, some adhere to it others fall prey to "hidden dangers" which are concealed in the pit. Etymologically pitfall refers to a ‘concealed hole'. Investors have to be wary and alert in order to avoid falling into this hole.

Learn from Warren Buffet

In his customary manner Warren Buffet was unequivocal when said that "An investor needs to do very few things right as long as he avoid mistakes". The hidden dangers as referred to above, come in different forms-

I. Incorrect information or the total lack of it.

II. The various emotions and the underlying psychologies associated with them.

III. Excessive or rather regressive taxation rules.

Learn investing through the logical approach:

The best way to avoid pitfalls is by taking a pragmatic approach. The investor needs to weigh his options and assess the risks associated with these options. The tangibles and intangibles have to be measured with the help of both qualitative and quantitative measures.

Learn investing through the rational approach:

A rational approach is one when the investor accounts for the vagaries associated with probability and unpredictability. Learning to capitalize on unforeseen situations and unlikely events is the essence of rationality in an investor. The forces within the market can harm the investor. They can cause the investor to succumb to them.

The author is Ramalingam K, an MBA (Finance) and Certified Financial Planner. He is the Director and Chief Financial Planner of Holistic Investment Planners (www.holisticinvestment.in) a firm that offers Financial Planning and Wealth Management. He can be reached at [email protected]