Most people in the markets aren’t “newbies.” They’ve read the books, followed the gurus, maybe even cleared a certification or two. Yet, the irony is—they still keep losing money.
Why does this happen? If you already know the rules of investing, shouldn’t that protect you from losses?
The truth is, knowing is not the same as doing.
Let’s dig deeper.
1. KNOWLEDGE Vs. BEHAVIOUR
Knowing: You’ve read that you should “cut your losses early.”
Doing: When your stock falls 10%, you tell yourself, “It’ll bounce back, I’ll wait.” Soon that 10% becomes 30%.
Markets don’t punish lack of knowledge—they punish weak execution. The gap between what you know and what you do is often where the losses pile up.
2. THE EMOTIONAL TAX
Even if you know every chart pattern and valuation ratio, the human brain is wired for survival, not investing.
Fear makes you sell too early in rallies.
Greed makes you average down into falling stocks.
Hope makes you hold onto losers longer than you should.
This “emotional tax” silently erodes portfolios more than brokerage fees ever will.
3. RULES ARE SIMPLE, BUT MARKETS AREN'T
Everyone knows “buy low, sell high.”
But what’s low? What’s high?
The rules you read in books are principles, not ready-made answers. If you apply them mechanically without context, you’ll get burnt. Successful investors don’t just know the rules—they know when the rule applies and when it doesn’t.
4. THE ILLUSION OF CONTROL
Another reason you lose money: overconfidence.
Once you know the rules, you feel you have an “edge.” You take larger positions, ignore risk management, and treat the market like it owes you returns.
In reality, the market humbles anyone who tries to control it. Rules reduce risk, but they don’t eliminate it.
5. THE MISSING RULE NOBODY TALKS ABOUT
There’s one rule most investors never internalize: Position Sizing.
It’s not about how often you’re right—it’s about how much you risk when you’re wrong.
If you risk 50% of your capital on a “sure bet” and it fails, no rule can save you.
If you risk 2% per trade, even 5 wrong bets in a row won’t destroy you.
This is why professional traders survive decades, while retail traders quit after a few years.
6. THE FEEDBACK LOOP OF LOSSES
When you lose money despite “knowing the rules”:
Confidence drops.
You start second-guessing yourself.
You jump rules mid-way, trying to “fix” things.
Losses get worse.
This vicious cycle is less about markets and more about mindset.
7. HOW TO BREAK FREE
If you keep losing money despite knowing the rules, try this:
Write down your rules. If they’re not on paper, they don’t exist.
Backtest them. See how they would’ve worked in different market cycles.
Follow position sizing. Don’t risk more than 1–2% of your capital on a single idea.
Track behavior, not just trades. After every trade, ask: “Did I follow my rules?” even before asking “Did I make money?”
Think long-term. The rules make sense only when you zoom out. Daily noise will always tempt you to break them.
FINAL WORD
The market doesn’t reward knowledge. It rewards discipline, consistency, and emotional control.
So, the next time you wonder, “Why do I keep losing money even though I know the rules?”, remember:
👉 The problem isn’t the rules.
👉 The problem is living by them when it hurts the most.
These simple equations can help you make better financial
decisions and grow your wealth — even if you're not a math wizard.
Want
to measure your financial health?
Personal
finance ratios, as well their closely-related cousin “rules of thumb,” are a
great starting point.
In a
matter of seconds, you can benchmark your current financial situation and
habits to make better decisions about your financial future.
But when
it comes to measuring your personal financial health, ratios don’t tell the
whole story.
In this
post, we’ll take a look at a few important numbers, dates, rules of thumb and
ratios that can help your improve your financial decision-making.
The Two Financial Milestones You Should Track
Two of the major financial milestones in your life
are the date you become debt-free and the date you reach financial independence (when your
investments can cover your living expenses for the rest of your life).
Tracking these dates is powerful because they
take your entire financial picture into account — including your current
assets, liabilities, income and expenses — giving you one number that shows
exactly how you’re doing.
Note: For getting out of
debt, track the number of months it takes to become debt-free outside your
mortgage. For financial independence, track your expected age to reach your
goal.
With these
numbers in hand, you can make financial decisions with one simple question in
mind:
Will this increase or decrease my target
date?
How To Calculate Your Debt Payoff Date
Tracking
the number of months it will take to become debt-free should be the first thing
you do on your journey to financial independence.
But most
people avoid looking at this number. Which means they never gain clarity into
what they should do.
Calculate Your Financial Independent Date
The rule
of thumb for reaching financial independence is that you need to save 25X your
annual expenses. For example, to live on $40,000 a year, you’d need $1 million.
Traditionally,
this is outside of any other income sources (such as social security, work from part - time jobs, etc…).
While you’ll want to calculate your target
financial independence date, the 25X rule of thumb is quite helpful in
decision-making.
For Example,say you have a taste for luxury cars. This may increase your expenses
by $200 a month or $2,400 a year (compared to what you’d pay for a non-luxury
car). You can afford it, so no big deal, right?
Well, just
know that to keep this up in retirement you’ll have to save an additional
$60,000.
It’s a good mental exercise to go through
your expenses this way. Take a monthly expense and calculate it by25X; that’s
how much more you’ll need to save to continue to afford thisexpense.
Helpful Personal Finance Ratios
The Most Important Financial Ratio
What’s the
most important financial ratio — the one financial ratio I always make sure to
check?
My savings
ratio.
This is easy to calculate:
Savings Ratio = How Much You
Saved ÷ How Much You Made
For those
starting out, it’s better to track this number on a monthly basis. The formula
looks like this:
Savings Ratio = How Much You
Saved This Month ÷ Your Monthly Income
It’s also important
to define what “saving” is. My preference is to count only savings I invest.
What’s the ideal number you should aim for?
Some experts say 10%. Others say 20%.
My
preference? Don’t worry about the perfect savings ratio today. Instead, start
to track this
number.
Then, aim to increase it. If you increase it by 1% every
three months, in four years you’ll be saving16% more than you are today.
2. Expense Ratios Of Investments
A study by
the Center for American Progressfound that theaverage 401 K plan charges a 1 percent fee.
Another
study by theICIfound theaverage mutual fund expense fee is 0.63 percent.
Why are
these numbers important?
Look at
this example, from the Department of Labour (as relayed by Nerd
Wallet):
Assume that you are
an employee with 35 years until retirement and a current 401(k) account balance
of $25,000. If returns on investments in your account over the next 35 years
average 7 percent and fees and expenses reduce your average returns by 0.5
percent, your account balance will grow to $227,000 at retirement, even if
there are no further contributions to your account. If fees and expenses are
1.5 percent, however, your account balance will grow to only $163,000. The 1
percent difference in fees and expenses would reduce your account balance at
retirement by 28 percent.
That’s why
it’s important to know about any and all fees. But they’re called hidden fees
for a reason: because they’re hard to find.
3. The Emergency Fund Formula
How big is
your emergency fund?
To find
out, take your:
Cash on
Hand ÷ Monthly Expenses = Emergency Fund
The
general rule of thumb is that you want an emergency fund of at least three
months but no more than six months.
An emergency fund that’s too small puts you
at risk of not being able to deal with a financial setback. But an emergency
fund that’s too big means you’re losing money to opportunity cost.
However,
instead of worrying about rules of thumb, it’s better to answer this question:
How much cash do you need to feel comfortable
and sleep well at night?
In a study titled “How Your Bank Balance Buys Happiness", researchers found:
“Having readily
accessible sources of cash is of unique importance to life satisfaction, above
and beyond raw earnings, investments, or indebtedness.”
Everyone
is unique. My preference is to have as little as possible. I’ve gone with an
emergency fund as low as one month. However, I’m a personal finance geek who
likes to optimize everything.
Others may not be able to sleep well at night
with just one month of savings tucked away. Instead, they may prefer six months
(or even 12 months).
One tip to
help you calculate your ideal emergency fund is to imagine your financial
doomsday.
For Example, answer the following question:
What would I do today if I lost my income,
the value of my home cratered, and my portfolio dropped by half?
By
thinking through your actions in this scenario, you’ll get a clearer
perspective on the role an emergency fund would play in your life.
4. The 28/36 Rule
The first
thing you need to know about the 28/36 rule is that it’s not a
rule used in financial planning. Instead, it’s a rule lenders use to determine
how much debt you can “afford.”
The rule
states that you shouldn’t spend more than 28% of your monthly gross income on
housing (which includes principal, interest, taxes and insurance).Then, your
total debt payments (housing + all other debt) should not exceed 36% of your
income.
It’s
important to look at this ratio from both a lender’s and consumer’s
perspective.
For
lenders, the purpose of the 28/36 rule is to determine the largest amount of
debt a person can have.
In other words, the formula identifies the
largest amount of debt banks think you can manage with a reasonable chance of
paying it back. Remember, they want to loan you the most they can, as this
maximizes the bank’s bottom line (but not your finances).
So what’s
a better way to determine how much house you can actually afford?
5. How To Determine Your Asset Allocation
A general rule of
thumb for asset allocation is:
Stock Allocation = 100 – Your
Age
Specifically, one
should invest in a percentage of stocks equal to 100 minus their age, with a
bond allocation making up the remaining balance.
For example, a
40-year-old investor would invest in 60% stocks and 40% bonds.
While one can argue
this advice is outdated (I would agree), it still holds some value as a
starting point.
There’s clearly a misunderstanding of asset
allocation among investors both young and old.
As for this formula
being outdated: we have better models today to maximize return and minimize
risk. Nonetheless, the ratio teaches an important concept, which is that your
investing strategy should get more conservative as you age.
Final Thoughts
Peter
Druckerfamously said,“What gets measured, gets managed.”
Another
quote of Drucker’sthat’s not nearly as famous but just as true is, “There is
nothing so useless as doing efficiently that which should not be done at all.”
In
other words, it’s not just about tracking your personal finances: it’s also
about tracking the right things and using that information to make informed and
intelligent decisions that improve your life.
3 Important Financial Goals You Should Achieve Before
30
The time between your 20s and 30s is probably the one with most adventure.
Vast majority focuses on their careers and degrees, but there are certain
things you should focus to achieve true financial freedom and independence in
future. Maybe you have done pretty well in managing money, or maybe you have no
idea how to, because you have just started to make money. Today, I’m going to
list out 3 important financial goals you should achieve before 30.
1. Build Your Own Wall
Money makes money; and the money that makes money, makes more money.
-----------Benjanim
Franklin
I remember when I started working at a very early age, all I had in my mind
was to buy a new latest Nokia N73 phone. The cost of buying that phone was
probably 10 or 20 times my monthly salary. However, I still wanted it for some
silly reason.
Finally when I accumulated enough money to buy it, I found it very difficult
to spend it in one go. I couldn’t imagine myself buying a depreciating asset
with months of salary. Even though I had no idea what a real asset or
depreciating asset could be at that time. I still knew I could use this money
somewhere more sensibly.
After several years, I’m glad I didn’t buy that expensive phone. Had I
purchased that phone, the value would have become zero till now. However, that
was not the only good thing, it also helped me get a kick start to build my own
capital. Although I spent some amount of it, but I somehow managed to invest
the remaining in places where it could grow.
The problem
However, not many gets the luxury to save with patience and convert it into
a capital with their own hard work. I have seen many people who hardly have any
cash in their bank accounts. Forget about building a capital. If you’re among
the group who don’t have enough savings to keep aside then you probably need to
work hard. Or you need to upskill yourself to leverage your time and earn more,
to increase your income.
For the remaining who are salaried and can easily save, faces another
problem. Where to invest? Our Indian culture definitely teaches us to save
money but it never teaches us to invest wisely. As soon as we save a
significant amount, it is either spent on unwanted luxuries or on depreciating
assets whose value drops to 0 in few years.
Today, that small amount that I invested has grown to a much
larger corpus (my wall) with the help of compounding effect and it keeps on
growing at a much faster pace. Seeing that amount growing steadily gives
immense satisfaction and when I look back, that younger me took the best
decision of life. A small fund created to buy a phone is now my wealth with few
more zeros added to it.
2. Education; an enlightening experience
My poor dad often said investing is “risky“. But my rich dad said
being financially uneducated is risky!
-----------Robert Kiyosaki
Can you explain what a Mutual Fund or Stock Market is, to your parents or
someone elder than you? Or any concept which is new to someone who is double
your age? Well we can, but the amount of time they’ll take to understand the
concept will be much higher.
Think about technologies like a mobile phone. Why do old people resist using
new technology like the latest phones and computer so much? The answer is, the
older you become, your capacity to absorb new information reduces drastically.
In fact, in a study, it was concluded that new information-processing speed
is highest in a human during their 20s. So if you’re in 20s, this is the best
time to learn how a Mutual Fund works or how to file for a tax yourself. How compounding works
or what’s the effect of inflation in long term. Anything that you’re curious
about now, explore it and master it.
Few years down the line, these concepts will
look more like technical terms. The more you ignore, the more dangerous it will
be. You have the internet and so the access to all the books for free. Remember, the older you become, more dependent you’ll be on others if
you don’t learn it now.
To make it simple, information-processing speed becomes considerably slow
during our 40s and keeps on reducing thereafter. However, the best part is that
it doesn’t mean you become dumb. The same study also indicated that old people
are able to rely on their real knowledge, experience and expertise. Hence the power of compounding works in knowledge too.
3. Budgeting; too boring?
Many people are often turned off by the simple term budget. They associate
it with limitations and a lot of hassle and headaches. They may feel like they
are too poor to budget or have other budgeting excuses. However, little do we
know, it is a trait of wealthy people. Corporations do corporate budgeting,
government does government budgeting, then why don’t you?
How does the story of a common middle class person look like? Something like
this: They receive their salary at the beginning of the month, 30%-50% of it
goes to their landlord for rent or for home loan EMI, 20% of it goes to the
local grocery store, 30% goes to random bars, luxuries, and ecommerce sites and
the remaining 20% is eaten up by their desires.
By the end of the month, they are left with little to no money and waiting
for the next payday. Sometimes they even stretch their spending limits though a credit card/loan or by borrowing.
This is the worst way of managing money. It simply indicates that your banker,
landlord, local shop owners and ecommerce sites here are the real
winners. They are attracting you to buy things you don’t need or can’t
afford and you’re falling into that trap just because it’s on discount or
he/she too have it so I should have it too.
Moreover, banks take the money from us automatically in the form of EMI. The
real meaning of EMI is "Equated Monthly Installments" but 95% of the people think the full form of EMI is
“Easy Monthly Installments”. Why? it’s because the banks make it look easy when
you go to buy but ask anyone who actually pays EMI whether it’s actually Easy.
The problem again
“Too many people spend money they haven’t earned, to buy things they
don’t want, to impress people they don’t like.”
- ----------- Will Rogers
We need to understand the fact that banks are not our friends. They are in
our society to do business and make money. Banks are “For-profit institution”
and government supports them for two reasons.
1. They give revenue to
government in the form of tax.
2. They help in increasing the spending power of
common people which eventually helps in increased GDP.
However, increased spending has no direct relation to our income. Banks are
giving us the power to spend more and stretch our spending, however our
productivity and income remains unchanged. The earlier we
understand this concept, the better.
Hence, if you want to be a winner in the game of money, follow this golden
rule: "Pay Yourself First and Do It Automatically. If you stay away from it, that
means you want to stay away from financial freedom and happiness.
I was shocked when I did my budgeting for the very first time and realized
the amount of money I spent on silly things. Try making payments for all your
expenses from a single source like UPI or Paytm for a month sincerely then go
back and do the math after a month. You’ll definitely be surprised how fast
money flows outward.
Unless and until you don’t do a strict budgeting and stick to it, you’ll
have a hard time getting your finances in order. If you don’t do it now, how
can you expect to become a master of it later?
Countless self-made millionaires have told me that the journey to wealth is
much more satisfying than the destination. When they look back over their
history of building wealth, they recall constantly setting economic goals and
the great happiness gained from achieving them.
Thomas J Stanley, the person
who did PhD in researching wealthy people’s lifestyle wrote in his book The Millionaire Next Door.
To Conclude
Start saving small portion of your income regularly by paying yourself
first.
For ex. If you deduct even 5% of your salary every month for investment,
you’ll hardly notice any impact of it. Then steadily keep increasing it. The
amount you’ll accumulate over time will be enormous. Keep yourself educated
about the important topics that matters, read books, blogs like this. Finally,
start creating a budget by spending some time every month or quarter to control
what you have before it becomes history.
The average price of a 1BHK (1 bedroom hall kitchen) house in Mumbai is
approx Rs.70 lakhs to Rs. 1 crore. The further you go
towards Mumbai city (towards Colaba), the price keeps on increasing upto
average Rs. 3-5 crore.
On the other hand, a graduate/post graduate with around 3-5 years of experience
(in late 20s) earns around Rs.
30k to Rs. 80k a month. Hence, this question, should you buy a home loan
or invest in this city of India. My Home Loan vs SIP comparison.
“Is it possible for a middle class person to buy a house in Mumbai with
their own salary?” My friend asked. I think this is a very important question
from finance point of view. However, 99.99% of individuals who say a “Yes” to
this question comes up with only one solution – Get a home loan.
Really?
How can a person who earns a mere Rs. 30,000 monthly buy a house
worth Rs. 70 Lakh. I’m not trying to demotivate anyone who think he can.
However,
1) I’d like to give a broader perspective on why the
prices are so high even when people are not able to afford it,
2)
Is it really an investment,
3) Comparison of home loan vs
investment options in India and
4) Alternative solutions to
this problem.
My view on why the prices have inflated so much
Now, let’s suppose you’re a hard-working engineer at a multi-national
company. You have a few years of experience, and earn about 7 lakhs annually.
However, you are not from Mumbai. If you’d like to stay here and buy a house
then the only house you can afford within Mumbai’s city limits is – a 1RK. I’m
dead serious. If you are from Mumbai, I’m 100% sure you’re able to relate to
this and validate this claim.
A 1RK in Andheri will cost you about Rs. 40-50 lakhs (I’m 100% sure I’m
quoting a less price here). If you’re lucky, it’ll have an attached bathroom.
With Rs. 7 lakhs per annum, you can afford to pay its EMIs for 25 years.
The alternative solution to this would be to go outside city limits, like
Vasai-Virar or Ambernath-Panvel. Where you can get a 1 BHK for that amount. But
are you prepared to commute long distances to your work place, by changing 2
trains and spending a few hours?
Though I’m a not a pure Mumbaikar, I stay with my parents in a Mumbai
Suburb, who bought this property about 25 years ago. Today with my salary, I
can’t even purchase a house in the building where I stay ! And its an ordinary
middle-class building, not some Hiranandani or Lodha-style complex. So now, you
will have a question, why the prices are so high and who buys it?
Real reason why the prices are so high
All this has been wrought upon by the nexus of politicians and builders,
who’ve pumped black money and inflated land prices in and around Mumbai. There
is one more party who is to be blamed for high prices which is mentioned below.
In the absence of a government regulator, land prices and their funding
mechanisms are unchecked, resulting in unaffordable prices for middle-class
people.
We’re facing a similar problem which USA faced before the 2008 crises. If
you’re someone who don’t know the real reason for the 2007-08 recession then
you should definitely read it once as it was the most latest recession the
world witnessed.
In short, the real reason for 2007-08 recession was people assumed the
prices of houses/real estate will always increase with time. The theory that
land is a limited resource and the population only increases which means the
price of land will go up proved to be wrong when people started defaulting on
home loan EMI and the banks were forced to do foreclosures which led seto
increase in supply of houses when nobody had money.
Bottom line is that, in my opinion the prices of real estate will not
increase the way it did in last 20 years. The reason is salaries and income
have not gone up in proportion to the way home prices have gone up. The minimum
wage paid to labor in the year 2000 was Rs. 4000 and now it’s around Rs. 8000/10000
or less. The minimum salaries, tax bracket have also only doubled but the
housing prices have increased significantly which cannot happen for longer
period.
Is buying a home loan EMI really an investment?
Let’s do a simple calculation
Let’s assume there were 2 friends Rocky and Jacky. Rocky did a graduation in
finance hence he had little knowledge about stocks and mutual funds hence
decided to put his money there for investments. Jacky was an engineer and
wanted a smooth life hence bought a home via EMI.
Jacky bought a house for Rs. 40 Lakhs with other charges his total cost came
to Rs. 43 Lakhs. He made Rs. 10 lakhs as down payment and for remaining Rs. 33
Lakhs he availed bank loan at 9.5% interest. For which he pays an EMI of Rs. 29691
for 20 years.
Assumedcost of the house = Rs. 40,00,000
Stamp duty and registration fees( assumed 7% on Average) = Rs. 2,80,000
Bank processing fee and MOD etc.., assumed at 0.5% = Rs. 20,000
Total Cost = Rs. 43,00,000
Down payment = Rs. 10,00,000
Loan taken = Rs. 33,00,000
Home Loan EMI = Rs. 29,691
Average Home Price Inflation = 9.5%
Total Interest paid = Rs. 38,25,830
Total Cost of home = Rs. 81,25,830
Market value of house after 20 years (assuming 7% returns as per past record) =
Rs. 1,54,78,737
Now let’s look at how Rocky’s investments have been:
House rent per month (Assumed the cost of the house to be 25 times the annual
rent paid.) = Rs. 13,500
Interest-free advance to homeowner (5 Months’ rent) = Rs. 67,500
Initial investment of Rs. 10,00,000 excluding rental advance towards mutual
fund = Rs. 9,32,500
Average mutual fund return = 15%
Monthly SIP = Rs. 16,191
Corpus generated after 20 years = Rs. 3,81,51,359
Other important points worth noting
House is
not going to give now return more than 7%. This is because on peak
already. Only if you purchase a land in a fast developing area then you
can expect a higher rate.
I’m not
counting rent as an income as you’re living in the house.
Government
of India is trying everything possible to increase the GDP hence the
consumption of Indians will grow. To enjoy the benefit of this growing
economy, you can invest in mutual fund and fetch 12–20% return.
You will
not have any liquidity issue as you can sell Mutual Fund Unit in shorter
term whenever you have any requirement like son/daughter’s study expense.
Home will
go in bad shape in 20–25 years till the time you actually own the house.
I’m not considering the amount you’ll spend on renovation and repair.
If you are
working you will have flexibility to change area, city or even country.
In case of
bad time, you won’t have pressure of paying loan EMI consistently for 25
years.
Jobs are
not stable the way it used to be in the past. Your father may have worked
for the same company for 20 years but look at how people are changing
jobs.
Last and
important point worth noting. A person who pays home loan EMI hardly gets
any moving for saving. This is because a large chunk of their salary is
debited for the loan EMI. Which
means they are putting all their eggs in one basket.
However, you have flexibility to choose different types of Funds such as
government bond funds which gives guaranteed returns. Even if there is a
recession, 20 year is more than enough to recover easily.
However if you are not very ambitious (not looking to start own business,
think different to uplift the standard of living) or does not want to take risk
and you have surety to give loan back even if you don’t have a job. Then you
can go with the loan option. However, only to those specific locations which
are being developed faster.
Conclusion
People were able to afford buying houses or properties easily 15-20 years
ago through salaries or business incomes and by keeping extra cash at home. For
example. If the monthly salary of an engineer in the year 2005 was Rs. 20,000
(Rs. 2,40,000 annually). They could easily save for 4-5 years and buy the house
on cash. Because the prices at that time were well within the reach of
a common-man. Since the demand for property was high and so the prices
increased drastically. It’s not the case anymore. You have to go
through the home loan route now because you can’t carry so much cash at home.
Also the way we’re spending nowadays because of Amazon and Flipkart doesn’t
make it possible either.
The mindset of Indian consumers have always been to save more and spend
less. However, this mindset of Indians are shifting with their lifestyle more
like the westerners (USA) where the consumption/expenses are higher and low
savings. Even a person earning Rs. 15,000 monthly salary will have a mobile
phone worth Rs. 30,000 and an Amazon Prime or Hotstar subscription.
The impact of social media has been huge, especially on the way we’re
spending on vacation trips and showing-off. It was not the same case in the
past. Think about it! This impact is more on younger generation who think
saving is boring
The India economy is following somewhat similar to the trends USA did in
1990s. Hence, my analysis concludes that the price of property will increase at
a much slower rate in next 20 years as compared to last 20 years.
Investing in Mutual Fund would be the best idea to take part in this high
consuming new society of India. Because when the companies make more profit,
the shareholders’ make more profit. Hence the share price increases and so the
Mutual Fund gains.
How to Invest Your First Rs. 1000
in Stocks – Step by Step Guide
Warren buffet once said: “If calculus and Algebra was
required for investing, I would have to go back delivering papers”. One common
reason why most people fear to invest in stock market is that they feel it’s
too complicated or you must be highly qualified for it. But if you educate
yourself with some basic Stock Market Knowledge, you’ll realize that the most
important element in investing is common sense.
Its said that “The first step is always hardest”, so I’ll try to make your
first step to invest in stock market simple. Investing is a must because “If
you don’t find a way to make money while you sleep, you will have to work until
you die”. And this makes a lot of sense if you wish to remove your money
worries and achieve early financial freedom in your life. Work hard, save and
invest in your 20s. Make the money work for you and relax in your 30s,40s and
beyond, instead of working for money for your whole life. So its your choice
whether to depend on your children after retirement, or be financially
independent by yourself.
Since you’ve taken the first step to invest in stock market. Lets dive right
in.
Step 1. Open your investment Account.
Once you choose to invest in stock market, the first thing you will need to
do is open a Demat and trading Account. As there are various sources and
platforms available, so people find it difficult to select the best one. They
just waste months, to choose a brokerage account, which may not have any impact
in the long-run. But on the other hand, they don’t even spend a single day to
search good companies, which actually will have a huge impact in their
financial lives in the long-run.
So just to make it simple, start with a discount broker, who charge lesser
as compared to others. Thus, you can buy any number of stocks, hold them long
and whenever the company pays dividends, it will directly get into your bank
account without any brokerage charge. The only time you pay brokerage is when
you sell the stock. However, I hardly sell any stocks because the big money is
made not while buying
or selling. The big money is made while holding
the stocks. If you understand the magic of dividends then you’ll realize what
I’m talking about.
Step 2. Decide : To Trade or To Invest?
Once you open your Demat account, the next important step you need to take
is to decide whether you are interested in trading or investing. People get
confused in these but there’s a huge difference.
Suppose, you buy a house at 9AM today, do you call and ask your broker at
10:43AM about its selling price? I bet you won’t. Because, if you are investing
in real estate then you are thinking about the long term passive income,
through the rent. Or sitting on it for decades to make huge profits. This is
called real investing. Whereas, in trading people mostly focus on frequent
buying and selling of the stock. This is because of the mindset people have
created where they buy and hold real estate for long term. But in case of stock
market, majority people consider trading because they want to get rich quickly
(which never happens). But once you buy and hold a stock of good company, you
will earn more wealth through the Compounding Effect. Very few people
understand this.
Step 3. Start with One Company
Once you’ve decided that you’ll actually invest for long-term, then I have
some simple advice for you that may help you to begin the journey wisely. First
of all, just pick the best company and invest your first few thousand rupees.
Many times people get the urge to diversify even their smaller amount into 10
different companies. That’s when they start speculating. They consider each
stock as a lottery ticket with the hope that one of them might win big profit.
But these are wrong practices that every beginner makes and fail in the
beginning. So to avoid failure at the beginning, just avoid speculation and
diversification when you start.
Another reason why people diversify their portfolio? It’s because they copy
portfolio of bigger investors, who tend to diversify their huge wealth one by
one through their past experiences and understanding the business. But this
copy and paste won’t help us. The reason is very simple. Rakesh Jhunjhunwala
invested in Titan in 2003 and that’s it.
He didn’t invest in 15 companies together in 2003. Secondly, he have already
made 60,000% returns so far. His networth more than Rs. 25,000 crores. So his risk appetite (the
ability to take risks) in new stocks is very different from you and me. He can
invest in a poor company that has high chances of failing because he has a lot
of money. But you and me cannot lose money in the beginning. If we lose our
initial capital, we lose all the wealth that it was going to create for us in
the future with the power of compounding.
You can surely select the companies who you think has the ability to perform
best in future by understanding their business. There’s a quote of Peter lynch,
“A stock is not a lottery ticket behind every stock, there is a business find
out what it is doing”. But most of the people have no idea where do we analyze
and buy the good companies in real.
Step 4. Understanding Business
So just to make it easy to you, I use stock screeners like screener.in or
Tickertape.in. Here, you can filter the good stocks and understand their
business. There are thousands of known and unknown companies. One of which is
reliance industry that is diversified with different products. But, just
investing because you are known to the name, won’t help you in the long run.
The most important thing is to understand the business—where your money
actually gets invested, how they make money and how they plan to grow in
future.
Now since have different business like Jio, Reliance trends, Reliance
oil & refinery, etc. They are group of companies and that makes it
difficult to analyze. It would be far better for you to invest in index funds
instead of such companies, because Index have 0% chances of bankruptcy and also
ensures you good consistent returns. But, still if you prefer to invest in
companies like Reliance Industries, then first you need to know their business.
And how do they earn profit. You can either open investors presentation or
annual reports, which would help you understand this.
If you open the latest annual report of Reliance, you’ll realize that in
Reliance Industries’ case, they have 6 earning segments. And they make most of
their profits through oil & refinery business which is from petroleum
sector. Then next, through retailer and digital marketing. But most of the
people invest in reliance just for Jio. But they’re unaware of the fact that
it’s just a small part of the whole group. If their refinery and petroleum
perform poorly in future, the stock is going to be down. So picking a Tata
Group company is far better because they’ve separated all their businesses such
as TCS, Tata Motors, Titan, Tata Consumer Products, etc. So if you feel one of
them is going to do good in the future, you can bet on that one particular
stock.
So you can choose simple companies whose products are known and you can
easily understand their business and growth. For ex. Pidilite industry which is
not so popular, but their products like Fevicol, Fevikwik are widely used. They
may not be as popular as tech companies but still have lot potential to grow
and growth continuously. There are no competitors for Pidilite and they’ve been
maintaining their market leadership since decades. This is visible in their
stock price. If you check the long-term history of Pidilite Industries’ stock price,
you’ll understand what I’m talking about it. Just Google Pidilite Industries
share and click the max button to check its 20 year stock price history.
So invest your ₹1000 wisely
by analyzing the company’s fundamental and not just by popular names.
Don’t think of it as a small amount of Rs.
1000. Think of it as the beginning of your 1st crore. (Titan went up by
600 times in last 18 years. So Rs.
1000 invested grows to Rs. 6,00,000.)
Step 5. Take a Simple Idea and Take it
Seriously
Hence. it’s important that you choose a company whose business could be easy
to understand, as this could help you stay invested for long-term and the
management can also stay focused on their core business. It might be growth
oriented and long term business that tries different methods to develop their
company. Warren buffet says, “I want a simple business easy to understand and
then I can see in general way where they will be 10 years from now, If I can’t
see where they will be 10 years from now, I don’t want to invest”.
For examples, if you see Reliance Industries, there’s renewable energy
sector or other tech sectors, where we have no idea where they’ll be in 10
years. But, if you take Good day biscuits, Maggi noodles, Fevicol or any other
daily products then they have high chances of predictability. And your odds of
losing money is very less here. As they are growing continuously since decades.
They’ll continue to get bigger with the compounding effect.
Even warren buffet had said, “Take Wrigley’s chewing gum. I don’t think the
internet is going to change, how people are going to chew gum or I don’t think
technology will change how people drink coke or how they shave.” That’s the
reason from many years, Warren Buffett has continuously been in the list of top
10 richest investor.
Final Words
Wealth is created through concentration and
retained through diversification.
There’s no point diversifying first few thousand rupees. It’s important to
focus on business fundamentals than just looking at the stock price. If
you fear so much then it’s better to just go with Index funds instead of
picking individual stocks. Because if you just buy random stocks by looking at
their price (that most people do), then you’ll forever remain in the game of
speculation. And you’ll never invest meaningful amount and will never create
wealth too. “Games are won by players, who focus on the playing field, not by
those people whose eyes are stuck on the scoreboard”. So, you need to focus on
understanding the business and learn more about timeless investing principles
than just speculating with the stock price. This will help you to earn wealth
for long period and give you early financial freedom.
