I have been married for more than two decades now. In all these years I have deliberately maintained a safe distance between my personal and professional life. My wife Anandi, a post graduate in Hindustani Classical music and an amateur poetess has never shown any interest in the matters relating to finance. She finds it too “dry and mundane”. Last few days though have been a little different. To my surprise, Anandi herself started a discussion on stock market. At once, I could not fathom why she would be suddenly interested in what she always believed to be the mired world of finance and investments. But soon I realized the catalyst of this change- it was her cousin brother Anuj, who has apparently lost heavily in the recent collapse in the stock market.
We had a long discussion last evening. I am sharing the following excerpts from our discussion with readers. I believe many may find it relatable and useful.
“Anandi (in an unusually hoarse voice): What are these small and midcap stocks? Do you also invest in small and midcap stocks?
Me (visibly startled): Are you OK? Why would you suddenly want to know this ‘silly’ jargon?
Anandi (clearing her throat): Those people are saying that it is end of road for these stocks!
Me: Who people?
Anandi: Those people on TV.
Me (wondering): But we do not have TV in our home!
Anandi (in the lowest possible note): Vrinda (Anuj’s wife) was telling me. Anuj is very tense these days. He remains glued to TV the whole day, shuffling between various business channels. He does not even allow kids to watch cartoons. Apparently, he has incurred huge losses.
Me: But when we met three months ago, Anuj told me that he is doing very well. He even proudly claimed that he has made over 200% returns on his portfolio last year.
Anandi: He was actually doing well. In fact he bought Vrinda very expensive diamond jewelry on her birthday. They were even discussing buying a bigger flat this year.
Me: Then what went wrong?
Anandi: I do not know exactly, but Vrinda was telling me that he bought some ‘small and midcap stocks’. Some ‘bad people’ manipulated the prices and he practically lost his entire wealth. He may have to borrow money against their house to pay for the losses.
Me (shocked): But even ‘bad’ stocks have not lost more than 50-60% in this collapse. How could he lose more than his investment?
Anandi (confounded): I do not understand all this. You never taught me all this. Vrinda knows all about stock markets. Tell me you don’t buy any ‘small and midcap’ stocks!
Me: See Large cap – midcap - small cap; long term ‑ short term; value investor – speculator etc. is nothing but jargon created to unnecessarily complicate the process of investment and compel investors to make mistakes. Even if we accept the popular jargon, most small and midcap stocks are not bad. In fact, many of these stocks become large cap stocks in due course. Stocks like HDFC Bank and Havells were smallcap stocks 15-20years ago.
Anandi: Then why is everyone sounding so skeptical about small and midcap stocks these days!
Me: No, not all people are skeptical about these stocks. In fact, the term ‘small and midcap stocks’ as it is being used in common parlance is a vague term, which does not mean much. I think Anuj may have invested in some stocks trading at a low nominal price. Some of these stocks may be manipulated by some unscrupulous people to cheat the gullible investors. The economic behavior of these investors is easily overwhelmed by the forces of ‘greed & fear’. Anuj must have been coaxed by the lure of huge profits in a very short period, and taken leveraged positions in these stocks.
Anandi: What is this ‘economic behavior’?
Me: Our behavior is the sum total of our habits and attitudes. Our economic behavior pattern also reflects our habits. Habits such as austerity, extravagance, procrastination, punctuality, disorderliness, meticulousness, laziness, diligence, etc., all affect our economic behavior. A lazy person procrastinates on important decisions like transferring money from savings bank account to fixed deposit and renewing his insurance policy. An extravagant person immediately spends whatever he earns, rather than saving money for rainy days. A diligent person keeps track of his income, expenses, and investment and is often able to gain from opportunities that a lazy person would surely miss.
Some of these habits we acquire from our environment, and the others we develop over a period of time. For example, a person born in an extravagant family is less likely to be austere, whereas a person born in a family with an army background is more likely to be punctual and orderly. Similarly, a person employed in a high stress job is more likely to be disorderly in personal life. An entrepreneur is more likely to be meticulous and diligent than an employee.
We need to closely scrutinize our habits whether self-developed or acquired from the environment and change those which we find are not conducive for wealth accumulation.
Before we make any investment strategy we need to take a self-evaluation test, to understand if we are actually making investments or just playing a game of dice. When deciding to put my money into any instrument, we must ask ourselves “Do I understand the implications in terms of risk and rewards? Or Am I just making impulsive investment decisions?”
An ‘investor’ invests his money only after properly weighing the risk and rewards. The objective of such investment is to “Earn a sustained stream of returns, and/or Make capital gains over a period of time; without bargaining for abnormal gains in the short term.” These extraordinary gains may incidentally occur in the short term.
On the contrary a ‘speculator’ would aim to earn abnormal gains in the short term, taking a very high risk on his capital. A trader would target to gain from the cyclical market trends taking buying and selling as his normal business. The approach, skills and aptitude to be a speculator or trader are altogether different than those required for an investor. The same holds true for the risk-reward equation also.
It is important to maintain a balance between Liquidity, Safety and Returns on our savings. If someone goes beyond his/her risk tolerance limits and borrow money to gamble in stock market, his/her position would be the same as Anuj today.
Anandi (apparently confused and lost): I do not understand much of what we have discussed, but for God sake, avoid investing in ‘those small and midcap stocks’.
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