Investment: Mere Gamble Or A Wise Decision?

Posted on November 23, 2010 in Business and Economy

By Pallavi Murthy:

Well, before I begin let’s have a clear idea about what is investment. Investment is putting money or capital in an enterprise with the hope of getting profits on the money invested. Then who is an Investor? An individual or party who makes an investment is supposedly an ‘investor’. But being a mere investor is not enough. There are various strategies and rules involved in sane investments. There are two ways of making money — appreciation in the market price of the stock and dividends which the company pays to its share holders

Most people invest in a particular business without having much knowledge about the same. For example consider a person with bucolic roots who does not have much knowledge about the IT sector. Now, if he wishes to invest in the IT sector without knowing much about the businesses carried out by the company in which he proposes to invest then it is mere foolishness. On the other hand are speculators who make speculations i.e. they forecast the psychology of the market. They frequently make money. This is frankly gambling. Making speculations and betting on an uncertain outcome is simply gambling. If the market moves according to what you as a speculator have predicted then you make money. But if the coin tosses the other way you lose money. When the same thing is in done in derivatives and the coin tosses over (i.e. the market does not move according to your speculation) then you lose big money.

A true investor is one who knows the business well. He does not invest unless he has complete knowledge about the company in which he proposes to invest. It includes having knowledge of what the company sells, how it functions or operates, what is the competitive environment, what are the company’s strengths and weakness, the company’s balance sheet and also what are the threats, opportunities and the market share of the company in that industry. Also an intelligent investor invests for profits that are based not just on optimism, but also on fundamental investing. Benjamin Graham, the pioneer of value investing encourages investors to have confidence on their own decisions and not go by what others say. He says, “You are neither right nor wrong because the crowd disagrees with you. You are right [or wrong] because your data and reasoning are right [or wrong].” For good investment one should be more analytical rather than speculative.

When asked about his views on good investment, Shrey Sao, a National Stock Exchange certified market professional said, “Sane investment rests on sound fundamentals”. He also brings an analogy between Sachin Ramesh Tendulkar and a sane investor. It is not the number of runs scored by him in a match but the manner in which they were scored that matters, he says. Similar is the case with investments. The investor should foresee the risk return profile first. He should not invest in an industry about which he does not have good proficiency. If you are investing in the stock market for the long term, don’t invest when prices are overvalued and fundamentals are poor.

Take for example Warren Edward Buffett, an American investor widely regarded as one of the most successful investors in the world. In 1990’s he had not invested in the IT sector and thus did not incur any loss during the dot-com-bubble. No doubt, he made no profits then but at the same time he did not lose anything.

In the market there are 4 kinds of investors. The first ones are the bulls who have an optimistic view while the second ones are the deer who make money when the market value falls. The third ones are pigs who aim for short term profits and the fourth ones are the chickens who are generally scared about market future. The bulls and the deer survive in the market while the pigs and chickens get slaughtered.

As an investor one should always aim for a sane investment so that they can survive and not be slaughtered. Investment is all about making the right decision at the right time. It is not a gamble but a wise decision that needs to be taken. It is up to you to decide what u wish to be — An ‘intelligent investor’ or a ‘mere speculator’.

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