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Intelligent Investor

How to learn investing and become an intelligent investor

Best way to learn Investing

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“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 that 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 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 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 Investing 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 avoids 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.

Learn investing continuously

Successful investors keep themselves financially updated. They know how companies perform,
regulatory changes in tax, insurance, etc. They are also good at analyzing financial information to see how it affects their investments.

How doest it benefit?

Since they don’t stop learning, they will always be ahead of the other investors and wouldn’t repeat their mistakes or lose money due to ignorance. They get a foresight to protect money.

Learn investing strategies

Most successful investors have a good investment strategy. This is only possible with good research or experience. Whether it is a goal-based investing, diversification, or asset allocation, they stick to it. They are not worried about market falls and don’t follow random advice.

How doest it benefit

Since there is a good investment strategy, there is a discipline in investing which leads to long term profits. People with good investment strategies are likely to meet their goals and earn higher returns compared to those who don’t have a strategy.

Learn investing by mastering the emotional discipline

The reason there are many investing mistakes is that there is no emotional discipline. If there is no emotional discipline it will lead to impulsive decision making. It includes emotions like fear, doubt, anxiety, greed, overconfidence, emotional attachment, and other such feelings. This can move you away from your investment strategy.

How doest it benefit

Here is an example of a lack of emotional discipline. Selling stocks or redeeming mutual funds when the market falls, is an example of lack of emotional discipline. This normally results in losses. When you master the emotional discipline, you will have patience and the ability to stay
the course.

Learn investing by knowing how to cautiously spend money

Successful investors are cautious while spending money. They are also cautious that they don’t lose money. This means not spending too much on cars, houses, etc. They use discounts wherever possible and reduce expenses, this increases savings.

What actually happens?

With cautiousness, they invest to maximize returns and minimize losses. Cautious investors look for risk first and then the return. When you foucs on risk, you get returns. When you foucs on return, you get risk.

Learn investing with a proactive approach

Successful investors are always proactive and they never procrastinate. They understand the time value of not investing. Be it starting SIP’s, buying insurance, or filing tax returns, they do it within the stipulated time.

What actually happens?

As they are proactive and never procrastinate, their money is never idle in the bank. They invest their money to make the best use of it and to reach their goals. They never lose money by paying fines and penalties (penalties due to delayed payment of EMI’s or credit card bills).

Learn investing by knowing how to safeguard wealth

Successful investors not only create wealth but also protect their wealth. They make sure that their wealth is not eroded by inflation, market risks, ill-health, or death.

What actually happens?

Since they are careful about protecting wealth, they are prepared for all emergencies and have emergency funds, enough life and health insurance, and a will.

Learn investing for long term

Successful investors are not disturbed by short-term fluctuations. Be it achieving goals or creating wealth, they invest for the long term. They are not people who want to become rich overnight. They have patience and perseverance.

What actually happens?

Since they are investing for the long term, they are not very often distracted by short term volatility. So they don’t make impulsive decisions or suffer losses.

Successful Mantra to Learn Investing:

The mantra for success in learning to invest is of course the ability to observe, learn, and adapt to change tides while having a strong sense of confidence in one’s research. Successful
investors just don’t follow the crowd, they do their own research.

Letting the investment ideas come to you rather than rushing to make an investment based on hearsay can be healthy for the investor. While researching the investor has to do his job painstakingly by basing it on primary data and not secondary sources. Using conservative estimates to form “ranges of outcomes” will also provide protection from mistakes in the analytical process.

                              Common Mistakes of Investors
Fear Greed
Not buying Buying too much
Not buying enough Buying too aggressively
Not taking enough risks Taking too much risk

Learn Investing for a happy future:

A state where we are aware of what we know and what we don’t know is a state of equilibrium, we remain alert and at the same time seek to broaden the horizons of knowledge. Alertness and constant assessment of various factors around us help us to avoid the pitfalls. This is the approach which if perfected can guarantee a happy future for all investors.

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