I received lots of comments on the yesterday’s post (Investing lessons from down under). Most commentators agreed with my view that a good portfolio must be a balance of consistent compounders and emerging businesses; whereas few expressed strong disagreement. Unsurprisingly, amongst those disagreeing were both types of investors – those who prefer to stick with consistent performers; and those who prefer emerging businesses with a potential of abnormal returns in short to mid-term.
I find myself totally
disinclined to argue with any of the commentators, since I strongly believe
that investment is essentially a personal endeavour. Each investor will have a
different strategy based on his/her personal circumstances, requirements, and
aptitude. The widely followed investment strategies are basically templates.
Individual investors customize these templates to make an investment strategy
most suitable for them.
I however would like to
discuss one thing that stuck me hard while reading these comments. I found that
most commentators (I believe they all are investors) are not sure about the
primary goal of financial investments. Upon enquiry, I received the following answers:
·
Wealth
creation (40%)
·
Become
rich (25%)
·
Higher
profit (25%)
·
Others
(10%)
I wonder if these are
correct definitions. What I have read in management books is that “goal” of a
financial plan must be quantifiable and definite to the extent possible.
·
“Wealth”
itself is a vague term. Various people define it in different ways. There are
many who even refuse to consider “wealth” as a pure financial term. “Wealth Creation”
is even more vague.
·
“Become
rich” is even more vague. “Richness” in financial terms, is purely a relative
term. It may have entirely different connotation for persons living in Mumbai
and Madhubani. This goal is certainly not quantifiable.
·
“Higher
Profit” is also a relative term and could be infinite. It could mean higher
than alternative avenues of deploying savings. It could also mean higher rate
of return than a targeted person or institution.
In my view, the core of
investment strategy is to define a definite quantitative goal. Some examples of
these goals are as follows:
(i) Preservation of capital in real terms (inflation adjusted)
(ii) Return on investment of 10% more than
the nominal GDP growth
(iii) Return of 5% in USD term, since I am saving
for my child’s US education
