Atanuu Agarrwal, Co-founder, Upside AI
At Berkshire Hathaway’s annual meeting recently, chief Warren Buffett pointed out that none of the top 20 companies by market cap in 1989 were in the top 20 league today. Even in one of the hottest sectors in the 20th century – automobiles – there were over 2,000 defunct companies. In fact, after the 2008 meltdown, there were just three left. Two of them had been rescued from bankruptcy by the US government.
The conclusion in Buffett’s words: “I do not think the average person can pick stocks.” Backing his age-old recommendation to simply invest in an index fund, he said: “There was a lot more to picking stocks than figuring out what’s going to be a wonderful industry in the future.”
Data and research suggests that on the average human beings are poor at stock market investing. We are all susceptible to the fallacies of bias and emotion.
So, how does one get started on this potentially treacherous journey. Simple. Just follow five steps and set off your journey. Here you go.
Step 1
Some homework first: If you haven’t already read them, I would recommend two books to get started which, in my view, should be part of school curriculums.
1. The Intelligent Investor by Benjamin Graham: First published in 1949, it remains extremely relevant even today. It empowers the reader with a robust framework for investing and money management, which is arguably the most important resource in our lives.
2. Thinking Fast and Slow by Daniel Kahneman: The author won a Nobel Prize in 2002 for his work on behavioural economics. As he says in the book, the aim is to “improve the ability to identify and understand errors of judgment and choice, in others and eventually in ourselves, by providing a richer and more precise language to discuss them. In at least some cases, an accurate diagnosis may suggest an intervention to limit the damage that bad judgements and choices often cause.”
Step 2
Choosing the right asset: Before investing anywhere, it is imperative to fully understand your options. Asset classes available to a typical Indian investor are:
1. Equity – stocks, equity MFs/ETFs etc.
2. Debt – FDs, debt MFs, bonds, Provident Funds etc.
3. Gold – Physical gold, gold ETFs, Sovereign Gold Bonds, digital gold etc.
4. Real Estate – Physical assets, REITs, InvITs etc.
5. Cryptocurrencies – Bitcoin, Ethereum etc.
There is plenty of research readily available on each of these assets. High-level understanding of aspects like expected return, risk, timeframe, and taxation is important.
Step 3
Asset allocation: The next step is to determine the appropriate asset allocation. There is no one-size-fits-all type asset allocation. It depends on various factors like age, risk appetite, personal finances and circumstances.
It is important to determine the appropriate allocation to equities. Given the volatile nature of equities, it should allow you to remain invested without caring about stock market levels and the mark-to-market value of your investments. Equities is a long-term play and, by long term, I mean time measured in decades.
Step 4
Understanding equity segments: Within equities, an Indian retail investor can bifurcate her/him exposure in broadly three categories – large-caps, mid or small-caps, and international. The first two provide exposure to different sections of the domestic economy and the last provides some diversification away from India.
In the large-cap and international space, I would simply invest in index funds or ETFs that track an index. Over the last five years, 70-80 percent of active large-cap funds in India and US have trailed their benchmarks, which means that active managers cannot reliably outperform the respective indices.
For large-cap exposure, I would consider a Nifty50 ETF/index fund and a Nifty Next50 ETF/index fund. For international exposure, I would pick a couple of ETFs/index funds that track the NASDAQ 100 and S&P500. AUM (assets under management), fees and tracking errors are some important factors while evaluating index funds or ETFs.
In the small- and mid-cap space in India, there is still some scope to pick funds managed by professional managers. A fund manager’s track record relative to peers and the benchmark, and the fees charged are important considerations. Direct plans (versus regular plans) usually make sense since they usually charge around half the fees of regular plans.
Step 5
Alternative way: I do understand that the steps above may be a bit dry and passive for many investors. If dabbling in direct stocks or daily trading is of interest, then it is best to set aside a small pool of money for the same. The size of the pool should be such that losing all of it should not make a big dent in your net worth.
For non-professional investors, trading should not be expected to be a wealth generator, rather it should be viewed from an educational or entertainment point-of-view.
Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.