Being in one business for a long time helps – you can see more clearly. The main business that I have been in is “Watching people make money, losing money, their attitude towards risk and generally towards life”. Will do the lessons separately. Here is a list of risky behavior that has caused investors a lot of grief (not including business risk like choosing a wrong broker -I paid very heavily!)…here it goes:
1. Investing in an asset they do not understand: C As, Lawyers, Doctors, successful businessmen- are more susceptible to this. Their ego prevents them from saying “I do not understand what you are saying”. Typically they do leverage, F&O, shorting, day trading,…and get ripped off by their ‘brokers’.
2. Forgetting simple things like Compounding – small ‘returns’ over long periods can create great wealth. Like Doctors forgetting to wash their hands before touching patients. (About 90,000 patients DIE in USA every year because of infection caused by medical and para medical staff’s lack of simple hygiene – dread to think what it could be in India).
3. Investing in SHIT: You can only lose money, baby! When there is shit, clients will call and say – it looks like shit, smells like shit, Man IT IS SHIT! Come on, move and grow up. You do not have to bend, smell, and lick to know it is shit. However people do it all the time. I still do it. Hopefully the hurt is less!
4. Over-gearing: I could write a book on borrowing for investing. How much to borrow is really difficult to know. After all – biggest wealth creation has happened because of borrowing. However all those who have gone bankrupt have also gone bankrupt because of ‘leverage’ or ‘borrowing’. To strike a correct balance is not easy. So be careful, if you borrow.
5. Poor asset allocation: Keeping all of one’s money in the asset class which is the current favor of the market. So if the equity markets are doing well all monies are kept in equities. Or real estate. Or gold. Asset allocation is a friend, use it.
6. Poor diversification or over diversification: A guy in Satyam with 90% of his networth in equity shares of Satyam must have been wondering “how could my Networth go from Rs. 2 crores to Rs. 2 lakhs in a matter of a few hours?”. Well not enough people have learnt their lessons!
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