Investment is more about managing the risks than generating returns

A small investment, in mathematically convincing asset class, can be undertaken as a cost of learning. Believe me, psychological appeal will follow automatically. Volatility is the nature of investment

“Baat Sabki Tum Suno, Karo Wahi Jo Aaye Smajh Me Bhaaee.

Dosh Auron Ko Dene Se, Hota Nahin Nuksaan Ki Bharpaee.”

Translation: Listen to everyone, but do what makes sense to you, brother! Loss can never be compensated by blaming others

The above referred ‘Sutra’ appears to have been inspired by the following ‘Shloka’ from Rig Veda:

“Aano Bhadrah Kratavo Yantu Vishvatah.” (Rigveda – 1.89.1) (Let noble thoughts come to us from all directions.)

The Rigveda righty puts filter on incoming thoughts to be noble to be allowed in. But where is the sieve? What are the criteria?? Who calls the shots?

Pearls of wisdom are never prescriptive, they are descriptive. So, the sieve, the filter and the decision maker can’t be prescribed. They are specific to the very moment; hence, the uniqueness.

Let’s try to understand to what extent wisdom of Rigveda can be useful in the field of investment.

Open to all ideas:

An open and receptive mind is the first requirement to come out of inertia. As Newton’s first law of motion states, “An object at rest remains at rest, or if in motion, remains in motion at a constant velocity unless acted on by a net external force” so does the human mind act. It never wants to come out of the comfort zone. It goes the same way when it comes to investment decisions. We have people who love money and enjoy keeping more than the required amount in their cupboards; we have people who never want to come out of traditional financial products and then we have people who are enamoured of gold. It’s not that they have understood the asset classes and have taken a conscious decision to be in the asset they are in. It’s just metal inertia and opening minds for receiving different ideas and strategies that act on them like the ‘external force’ of Sir Isaac Newton.

Apply filters:

Everyone must apply at least following two filters:

The first filter can be familiarity. The more familiar an idea can be, the better a candidate to be sieved in and the vice-versa. Familiarity is to be seen with positive connotations. For example: Suppose you need to select a bank to open an account and are having no detailed idea about any bank. In the process of finding a bank, you come across two banks, one SBI and another XYZ Bank Ltd. At the first level itself, XYX Bank Ltd is filtered out.

The second level filter must be availability of human interface in dealing. It doesn’t mean that one goes regressively to manual era. But availability of the brick-and-mortar model must be ensured. Be cautious if everything is online. All-on-cloud types must be filtered out. There can be ‘n’ numbers of filters when it comes to selecting a fund or stock, but target audiences for today’s deliberations are first time prospective investors having no technical skills relating to investment.

Look before you leap:

Looking does not require exceptional skills. It requires one to keep eyes and ear open. Let your mortar senses endorse your decision before mortar organ writes a cheque for investment.

Follow Richard Feynman’s simple, three-part formula for gaining greater knowledge:

I. Figure out what you don’t know.

II. Educate yourself.

III. Teach it to a child or a novice.

The referred three steps if applied with Feynman’s three-part formula will ensure that the chances of bad investment are considerably reduced which should be prime concern for the beginners. This is in conformity with Warren Buffet two rules of investing:

Rule number 1: Never lose money.

Rule number 2: Never forget rule number 1.

Investment is more about managing the risks than generating the returns. As human beings, we all are susceptible to a behavioural bias called ‘loss aversion’. It is thought that the pain of losing is psychologically about twice as powerful as the pleasure of gaining.

If an investment asset class is not convincing even after applying the filters what have been discussed above, simply maintain a distance from them. Sometimes an investment may appear mathematically convincing but does not sound appealing psychologically. No worries! A small investment, in mathematically convincing asset class, can be undertaken as a cost of learning. Believe me, psychological appeal will follow automatically.

Volatility is the nature of investment. It’s an opportunity if handled with knowledge and patience. Without knowledge and patience, any nominal gain would be taken as luck and blame of loss will be put on others. But putting the blame on others never compensates the loss arising out of investment.

(The writer is Executive Vice-president, SBI Funds Management Ltd; Translation and text by Rachna, a Gurgaon-based investor and entrepreneur)