Archive for August, 2018

Ikea and herding

“We find that whole communities suddenly fix their minds upon one object, and go mad in its pursuit; that millions of people become simultaneously impressed with one delusion, and run after it, till their attention is caught by some new folly more captivating than the first.”

Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, one by one – Charles Mackay

Ikea store crowd

Charles Mackay knew a thing or two about herd behaviour (In investing it is everyone jumping from one investment to another ) having researched and written the book, “Extraordinary Popular Delusions and the Madness of Crowds” in 1841 ( Yes, in 1841!) . The book shows the manic schemes of those days such as Tulipmania, South sea bubble etc. But why am i discussing that along with the opening of the Ikea store in Hyderabad?

We are wired for herding as humans are social by nature living in large societies.

We are wired to what our neighbour’s are doing, if it was bell bottom pants for previous generation it is buying torn jeans today. it is biological not logical.

We herd into investments too, it was real estate 4-5 years back, bitcoin last year and midcap funds this year

For a bubble to break there is no need for anything, like the proverbial last straw on a camels back, bubbles collapse on its own weight

So as an investor how to prepare our minds for long term ?

Investments are a vehicle to reach your goals and are not a game to maximise returns quickly.  Would you hop in and hop off twenty different vehicles to reach your destination or take a direct flight ?

Investments are for your children’s education, your retirement, your wish for the good things of life like travel. It is for important goals so that we don’t have to depend on charity of others im old age and to educate our children in a better way. If we think about money this way, neither would we stand in queues infront of a store to buy something that we were perfectly fine without till the day before.

We are wired for short term flight or fight response which makes long term thinking difficult. Which is why so little people meet success in investing. We herd into investments at the wrong time and exit at the wrong time too.

Media plays a large part in it as bad news sells more than good news. You will never see a headline that says this investor made a fortune by being in it for the long term and not herding.

Successful investing is simple but not easy as it requires us to not move in and out of investments on short term performance.

Successful investing is more like farming if it takes 1o years for a mango tree to grow it will take 10 years, you can’t plant a tree today and expect fruits in 3 months. But once it is grown then it will give fruits for decades.

One easy way to beat short term outlook is not to look at our investments regularly,

Another way to avoid herding is to invest regularly so that you build wealth and you are not too bothered about short term fluctuations. This takes the trouble out of investing but remember this is for goals at least a decade away and not a money making machine where SIP’s go into one end and high returns comes out 2-3 or even 5 years later.

Hope you are part of the small set of people who invest for the long haul and avoid herds.

 

Happy weekend

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What Forrest Gump can teach you about investing ?

Sounds ridiculous? After all, Forrest Gump was an immensely successful movie and rightly so.  But what has it got to do with investing?

In the movie there is a scene where Gump says that his partner Lt. Dan has invested the money they got by selling their business in to “a fruit company” and that they don’t have to worry about money anymore.The fruit co is actually Apple !  When i saw the movie way back it was interesting to see how financial independence ( The stage where your investments return via dividends/interest is enough to cover all  your expenses +life goals)  was spoken about in a real practical way.

Not having to worry about money was in Gump’s words “One less thing to worry about”

The movie was released in 1994, others have written about how if Gump was real and they did invest in Apple back then it would be worth a few billion dollars or something like that ( Link : Forrest Gump & Apple ) . That is nice but the IPO came in 1980 and the stock till about 1998 hardly moved an inch for 18 long years, not sure if people would have waited that long! So the lesson is not that.

The real lesson is that financial independence is having ‘ One less thing to worry about’ and if we see around this is the number one cause of worry for most people, even among the middle class and sometimes even among the rich ! And the surest way to reach financial independence is finding out where we are and planning to get to the next stage till the final one of Independence is achieved. This is not an impossible task, there are few steps to financial independence whereever you are aspire to go up the next level and diligently plan for it.

Step 1 : Stop living EMI to EMI and pay off all debts. ( Home loans for the house you are living in is fine!)

Step 2 : Start saving for a rainy day. Aim for 6 months expenses saved in a FD, may be tall order for many but this is essential.  Get enough Insurance cover both life and medical, buy plain term plan in life and opt for a healthcare insurance for all members of family.

Step 3 : Start investing if possible monthly or quarterly, this should be for your future goals and financial independence. This should be invested in equity and bonds and not just saved, ie the money has to work for you and not sit in the bank FD where you lose half the money to inflation and other half to taxes !

Step 4 : You are now financially secure, your investments in step 3 earns now enough to pay for most of your living expense, ie your money works for you now. You may still have to work to meet life goals like your childrens education or luxuries of life like being able to go on trips abroad, etc but the basic expenses are covered by investment returns.

Step 5 : Financial Independence is some time after stage 5, income from investments via dividend or interest is enough to pay for all expenses small plus the luxuries that you want. In Indian context generally step 4 itself is financial independence as we don’t indulge in big luxuries but times they are a changing.

On the coming Independence Day take a pledge to be financially independent too !

 

 

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