Wisely navigated investments can secure financial future and be rewarding

While your investment decisions should be backed by evidence-based data, it’s also crucial to recognize the elements of randomness and luck inherent in the markets

“Han! Wo Sach Me Bajaar Ka Jaankaar Hai, Uskaa Har Salaah Sadaa Sahi Hotaa Hai

Aadhon Ko Keemat Badhegi Pakka, Keemat Giregi Nishchit Baakiyon Ko Kehtaa Hai”

Translation: ‘Yes! He is an impeccable financial advisor, his 100% recommendations are correct;

To half, he predicts a market surge, to the other half he prophesies that it will correct.’

I would often be surprised by the uncanny ability of a few people who come up with stock tips correctly. I have also come across many instances where the direction of the price movement of specific stocks was predicted well in advance correctly. My only point of doubt has been why should a person who is endowed with such a knack must work or make recommendations.

I continued to be baffled till I glanced through the Warren Buffet article, ‘The Superinvestors of Graham-And-Doddsville’.

I reproduce an excerpt from the article for everyone’s benefit:

“Before we begin this examination, I would like you to imagine a national coin-flipping contest. Let's assume we get 225 million Americans up tomorrow morning and we ask them all to wager a dollar. They go out in the morning at sunrise, and they all call the flip of a coin. If they call correctly, they win a dollar from those who call wrong. Each day the losers drop out, and on the subsequent day, the stakes build as all previous winnings are put on the line. After ten flips on ten mornings, there will be approximately 220,000 people in the United States who have correctly called ten flips in a row. They each will have won a little over $1,000.

Now this group will probably start getting a little puffed up about this, human nature being what it is. They may try to be modest, but at cocktail parties, they will occasionally admit to attractive members of the opposite sex what their technique is, and what marvelous insights they bring to the field of flipping.

Assuming that the winners are getting the appropriate rewards from the losers, in another ten days we will have 215 people who have successfully called their coin flips 20 times in a row and who, by this exercise, each have turned one dollar into a little over $1 million. $225 million would have been lost, and $225 million would have been won. By then, this group will really lose their heads. They will probably write books on "How I Turned...”

The excerpt highlights the role of luck in investing. This simple game of probability can be utilized by a crooked financial advisor or broker to make the ignored and gullible investing community believe in his prowess. Besides investing themselves, these investing communities would become marketing agents of the financial advisor.

Taking a cue from the Buffet story, if a stockbroker advises 50 per cent of a group to buy and 50 per cent to sell a certain stock, and then continually provides advice to the 50 per cent, who are successful, some will inevitably achieve high returns purely by chance. This illustrates that such outcomes are often the result of manipulating the probabilities rather than genuine investing expertise. In addition to the above, there may be stock operators on the prowl trying to manipulate stock prices at the cost of the small investors.

A lot of people start believing blindly in their so-called investment gurus or sometimes start following finfluencers (An influencer who gives advice on financial investments). and YouTubers on investment matters, and quite often without any due diligence on their part. Listening to such finfluencers is fine but following them blindly can be disastrous. There is always some form of randomness and unpredictability inherent in investing, even for those with experience. In investing, there are no guarantees, and being mindful of this can help one avoid costly mistakes. A major red flag in investing is when someone promises guaranteed high returns every time. Red flag must be raised if an advisor is proven unbelievably right, especially so, if it comes for free. In the words of Morgan Housel, “Everything has a price, but not all prices appear on labels.” So always try to gauge the price of free tips or free advices.

Just like staying informed with the news, successful investing requires patience, time, and the willingness to consult multiple sources before forming a well-rounded perspective. While your investment decisions should be backed by evidence-based data, it’s also crucial to recognize the elements of randomness and luck inherent in the markets.

In today’s world, investing has become almost essential, and doing it right is the key to reaping benefits rather than incurring losses. By approaching investments with a balanced mindset—one that values research and data while acknowledging market unpredictability—you can make more informed and thoughtful decisions. Investing is a powerful tool for securing your financial future, and it can yield significant rewards if you navigate it wisely.

Einstein once said, “I have no special talent. I am only passionately curious.”

I advise investors to step into the shoes of Einstein and become passionately curious or even simply curious. This will save many of us from committing too many financial and investment mistakes.

(The writer is Executive Vice-president, SBI Funds Management Ltd; Translation and text by Chaitanya Choudhary, B. Tech (Final Year), BITS, Pilani)