The only real mistake is the one from which we learn nothing
Henry Ford
A lot of what I am is owing to the investment mistakes I did at the earlier part of my life. It sounds a mouthful but this is an honest admission. My initial mistakes in the world of finance & investing made me identify pitfalls and essential learnings. While remembering my mistakes, I thought to note down the learnings in a blog post.
Buying a Flat Where Land Is Still Affordable.
My first real estate purchase was in 2005 and I was very excited to step onto the property ladder. The sum involved was 20 lakhs, which today at 10% return should ideally be valued at 1 crore. The only mistake I did > I purchased it so far from the city where people could still afford buying a piece of land. While Land at that time in that location was not affordable for me with my savings, it was for others. Adding to it, the developer didn’t fulfill his commitment and after 16 years, there aren’t any sellers or tenant. Value of my investment of 20 lakhs is today zero (vs around 1 crore in today’s cost). A costly mistake back in 2005 and lessons well learnt !
Insurance Policies – ULIPs and Endowment Plans
I got my my first shiny pay check back in 2004 and was excited to get onto the investment ladder. Often, excitement and money lands one in a soup and I was no different. I got myself lured (purely my mistake) by a well groomed Wealth Management banker. My ego got onboarded on a ‘Priviledged’ ‘Gold Class’ Wealth account with an superbly marketed investment plan. I bought a ULIP Insurance policy! It paid 3 annual premiums totaling to 75K and paid 50K in transaction costs. I became wiser by the 4th premium date and closed it off at a loss of around 50K. I can still remember the pain which I felt at the time of closure. But looking back, this was such a great learning at an early stage when stakes were not that high. If I did the same mistake today, I would have to consider going back into the job market.
Futures Derivative Trading
I have been there & done that but this time by gods grace not at a huge loss. The stakes from my end were in a few thousands when I put my hands on them in early 2000’s. There used to be a ‘badla’ trading which was similar to today’s stock futures trading. I doubled my initial investment in a few months and immediately attributed the gains it to ‘MY SKILL’. The reality was that I was being played by the gods of ‘Mr STOCK MARKET’. And then the ‘Mr STOCK MARKET’ took it all away in a sweep – both my returns and my initial capital. My ego was crushed and I went to the books. I did lose because of leverage and my ability to think that being a CA I knew the plot. Stakes were peanuts at that time and memories of those moments keep me far away from this product till date. It is not investing – rather close to speculation. And when it comes to speculation, my history has proven me that my luck hit rate is not even 50%.
Stock Trading – Buy Today, Sell Today / Tomorrow
My initial experience of investing in stocks started with the usual suspect – buying and selling stocks very frequently. Off late I stumbled upon a ledger where I used to keep records of my stock transactions and it made me relive those adranaline rush moments. I would buy a stock in the morning and if I made even 1%, I would sell it off during the day. The next day, I would end up buying the same stock at a higher price and keep on repeating the same. I would make a meagre 1-2% in each transaction and often wipe it off via a massive loss via another holding.
If I had bought the right stock and held on to it for a longer, I would have made 2-5x instead of zilch. The only person who was definitely making money was my broker owing to repetitive brokerage paid on buying & selling.
It was painful to see that I touched upon so many multibagger stocks at that time – bought & sold Eicher Motors at 250 Rs per share (today at 30K). I may have made max 50 of the 29K journey. And there are so many more good & bad examples. I realized this after 5 years and post that my average holding period has ended up being a decade. The outcomes are self evident where I see my wealth multiplying.
Investing in Funds with previous returns
I started picking up mutual funds like many other investors. I would go to a return comparing website and find out top performing funds (via the stars they got) and invest into them. As if by black magic, the website would come to know that I have invested into those funds and they will start reducing the star ratings. In a few quarters, my fund would vanish from the list of top rated investments and new ones will replace. I would hop from my existing funds and get into the newer ones. And by the time I did that, some of my exited funds will start getting their ratings back.
What was I doing and if this was my fate ? I was buying the funds when they were at their peak high valuation, selling them when they were at low prices and buying something else at higher price again! It took me a while to understand that it was like driving my car but instead of looking ahead, I was driving by looking into the rear view mirror. I would have done much better if I would have invested in a fund which was a worse performer and exiting (if needed) it when it started getting a star rating. Very few investment fund continue to stay in the top spot at all times. Business cycles rotate and it is very inhuman for a human to forecast when a cycle is ending and another one is starting. The changing business cycles impact the stocks which may be in a fund’s portfolio. A skillful fund manager will try taking corrective actions before the damage is done. But they would never be always right. A great learning that it was via my own actions I was damaging my wealth creation opportunities. Many times doing nothing helps in creating a huge difference.
Late acknowledgement towards Gold
I grew up in a family culture where Gold is considered as a safe asset and part of the family heirloom. This should be
no different to millions of other Indian households. Gold will never be sold off unless the family financial condition is really bad. But I did not go one step further to decode why was it considered as a safe asset. It took me some time to realise the unique feature of Gold – it is an ‘inverse’ asset class. When all is going great, Gold will be ducking in a corner with no or negative returns. But when things are bad (remember the financial crisis of 2008, COVID crisis of 2020), Gold will be in lime light. Our ancestors only told that gold is safe, but this interesting correlation makes it a good hedge in one’s portfolio when added in reasonable limits. It may not give double digit compounding, but it may shine when you really need something to shine. You may visit my other blog post for more insights on Gold > Golden Path of Gold
International exposures
A person’s earnings and most of his / her wealth are susceptible to the same economic environments impacting the country where he/ she live in. For example, a bad monsoon could result in a drought, resulting in shooting up of the food prices in India. This is going to feed into a higher inflation. The central bank may increase interest rates, which in turn make cost of borrowing higher for businesses & households. Lesser savings owing to higher loan payments may result in lower demand for products. Businesses may not find some of their activities gainful and close / prune them down. Jobs may be curtailed. Stock markets may soon realize it and the markets would start correcting, bond prices may start falling and the domino effect starts. This was just one starting variable of a poor monsoon. An individual has no control over multiple such social, economic, political, geographical factors which impacts the fate of an economy. It is here where one could better manage investment risks by investing in other geographies which may not be impacted by the same economic uncertainties or during the same time. This could also help in taking a dollar exposure which may be of help for Indian savers who have only seen Rupee depreciation (our post Rupee Depreciation – How Does it Affect YOU). For more you may want to read my other post on Geographical Diversification – A Key Risk Management Strategy
The list of my investment mistakes goes on and continues to happen. Each time when a new mistake happens, I do try to identify what was the reason behind the mistake and learn lessons to avoid them in future. To help more, I now have a dedicated pot of money allocated to do mistakes as an experiments.