Learning to invest vs Investing to learn

Learning to Drive You’re on a fairly empty side-street, your cousin, an experienced driver next to you, in the passenger seat. It is her 8-year-old Fiat Punto, but the make or model doesn’t matter to you, just that it’s a functioning car. You don’t know if you will enjoy driving, but you want to be able to. You don’t know if your cousin is the “best” driver around, but you know she’s been driving for a few years and you trust her. She instructs you step-by-step to first push the brake, turn the key in the ignition, press down on

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The difference between Financial Planning, Asset Allocation and Security Selection

I get a few emails every week asking for stock recommendations. So I ask a few questions to form the context of the person’s experience with various investment vehicles, track record, their ability and willingness to take risk. In many cases, at this point, I realize the person asking for advice on stocks has little idea of their current financial situation beyond how much they make each month. This short post will clarify and differentiate between three interlinked but distinct elements of the wealth-building process: Financial Planning and Investment Management (Asset Allocation and Security Selection). Financial Planning: “The Where” and

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The Richest Man in Babylon

You never know where you find pearls of wisdom. In the movie, ‘Friends with benefits’, there is an exchange when Tommy (played by Woody Harrelson) meets the new guy in office, Dylan (Justin Timberlake). Tommy walks into Dylan’s office and notices that that there is no door where one used to be. Their exchange goes like this… Tommy: Oh! By the way, why did you take your door off its lovely hinges? Dylan: It was dumb, man. Something I saw in a management book. Tommy: Oh! Right! Right! Like that’s how Warren Buffett got rich. He took doors off of things! Hey, everybody

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The trouble with mutual funds

At a glance Equity mutual funds offer a convenient avenue to get professional management of your money to be deployed into stocks Diversification by exposure to a large number of companies and liquidity are also key advantages of mutual funds But the inherent disadvantages are expenses and investor behaviour in lock-step leading to large scale purchases and redemptions For the investor, the huge number of fund options offer a problem not unlike having to pick the right stocks In addition, the past variability in fund performance and unlikelihood of superior performance staying that way make choices difficult Exchange-Traded Funds (ETFs) mitigate some

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Developing a stock investment philosophy

At a glance Every investor needs a consistent basis for making all her stock investing decisions This basis allows the investor to stay the course in the face of short-term fluctuations Broadly two investment philosophies exist based on Fundamental Analysis and Technical Analysis TCI follows a value-stock investment style that looks for out of favour sectors at reasonable P/Es An investor should pick a style or philosophy that aligns with his temperament and proceed to refine it as he gathers more experience in stock investing In the last post (Election 2014 fever and deciding when to buy), I introduced Philip

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Election fever and deciding when to buy

In the fire hydrant post, I mentioned how every potential investor is inundated with a barrage of news / opinions / techniques to do his investing. It doesn’t help that financial news editors like using words like “surge” and “plunge” for routine market movements in their headlines. In addition, the investor has to contend with the enemy within – Mr. Market who exhorts him to jump in with both feet when markets rise and to dump everything when they drop. The Calm Investor doesn’t let the noise or his own biases stampede him into thinking of the stock market as a casino in Las

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Why stock prices move (Part 2 – The Long Term)

At a glance An investor needs to remember that a stock price represents ownership in an underlying business Therefore, a “fair value” for a stock depends on the market’s projection of future business performance Wearing an optimistic or a pessimistic lens can provide large ranges for this “fair value” The opportunity for the calm investor is in not getting caught up in the overly optimistic or the pessimistic views and comparing a prevailing stock price with what would be a realistic price based on historical business performance “In the short run, the market is a voting machine but in the

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Why do stock prices move (Part I – Short Term)

At a glance Stock exchanges like the BSE and NSE facilitate stock trading by providing the platform to match buyers with sellers The key price-setting mechanisms buyers and sellers follow are “at limit” (setting a pre-defined price) and “at market” (taking whatever is the prevailing price) When more buyers look to buy “at market” the price trends upwards and when more sellers do the same the price declines An investor’s ability to deal with short-term price movements has a huge impact on her success or failure Imagine you walk into a street market in a large city… You’re thinking of

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