Thursday, October 13, 2005

The Reminiscences of an Infant Investor

Just as children learn new things everyday I remember the childhood of my investment career and the best lessons that I learnt. I would like to recollect them and share with you all. Today I am 21 and these things are chronologically arranged from age of 18.

What lead to Investing?

I dropped out of engineering college in the first week itself. It was not easy to discard something for which you had worked hard 2 years. I managed to get the seat for half of what others were paying, based on marks. But I knew that it was not worth the money and most importantly time and it was like I take the decision now or end up here for the next 4 years. What next? Was the big question that loomed large before my eyes. But I knew that just because one does not know the way to heaven he should chose the one available to hell. My family has always believed that decisions are to be taken by yourself and thus no problem on that front also.

It was then that I also took charge that I have to learn by myself. Be my own master (It is a different thing that I did found my dream master 2 years down the line at 20). My love for books started then. I remember reading Jack Welch: Straight from gut & Losing my virginity by Richard Branson. I was very much impressed and realized that I want to become a business man. I went to my maternal uncle’s shop to learn something from his pharmaceutical wholesale business. I was there for 1 year and learnt the importance of working capital, competition, capital intensiveness without realizing that I have learnt those lessons. It was also then that I started to read Economic Times. I don’t actually remember about when I decided that I want to become an investor but it was around that period.

A baby is born:

Much like a 9 month incubation period I remember my uncle mentioning that one of his friend is starting a BOLT (equity trading house) after like an year or so after I had decided to become an investor. I said can I work there for sometime. He was not sure mentioning that it was more like clerical job and I don’t think they will even pay you. I reasoned out that sweeping once in a while does not make you a sweeper; moreover it makes you learn to keep your place clean. And as far as money is concerned a kid cannot ask his mother to pay him when all she does is to teach him to walk. I met his friend and next day I was at his office.

My encounter with Mr. Market:

My job was to handle Day Traders (in other words Speculators). I did not know the drawbacks of being a speculator or advantages of investors. I came across Buffett & Graham a little while later. But I knew that I want to invest in businesses rather than take cue from prices, but...

What I did was feed trades for the day trades in the computer and all I can make out was most of them were losing money but they were there day after day because once in a while they made a profit.

Reason:They attributed mistakes to something external and profits to their abilities.”

Lesson 1: "One cannot beat the markets by predicting prices.” (I mean speculating).

This meant I need to learn what works. My knowledge of fundamental investing was limited to the fact that I learnt about P/E’s, EPS, BV, Financial Statements from books that the BOLT had. The place at which I lived had no good library but had one lending bookstore. What I did was enrolled into it and read all the 20-25 books on stock markets they had. Most of them were about Options, derivatives, and of course “Benjamin Graham On value Investing”. I had heard that Buffett learnt his skills from Benjamin Graham, so was very much excited to have spotted that book. That introduced me to Graham & in short Buffett.

But the important thing is I tried to see if the strategies that options book had, were plausible or not. So what I did was started to think as a speculator- yes speculator. Then I was the first person who carried out an options transaction at the BOLT (of course it was my uncle’s account). The worst thing that can happen happened, I made 1000 bucks. What happened was I started believing that I can beat markets by predicting markets. I hope I had read John Kenneth Galbraith’s “There are 2 types of predictors: those who can’t predict and those who don’t know they can’t predict.”

Because I lost money big time 10,000 on the next option contract.

Lesson 2: “You are not as smart as you think you are

Back to the basics:

Though shattered I managed to recoup and continue my devotion to stock markets. The loss gave enough reasons to my maternal grand father to remind me “Stock market is like making money in the water. It slips even before you grab it”. But I managed to convince him that I have learnt a lesson and initial setbacks do happen. I don’t think they believed me but I did not care. Moreover I did pay heed to his words by becoming risk averse (10,000 is big money as far as I was concerned)

Now I dedicated myself to first learn and then start investing. In the mean time I carried on with my stint at BOLT. It was here that I learnt the few mistakes that most of the speculators make. I will run through them

Lesson 3:Don’t be a part of a herd

I was surprised to see that people just based on a phone call from head office at Mumbai bought shares and just sat being certain that they have made money. No thoughts on what if that slides instead and sure they did most of the times.

Lesson 4:Cutting the flowers and watering the weeds

I came across this term in Peter lynch’s book much later but the essence I was able to see that day traders booked profits as early as possible and kept averaging the losers. At the end of the day there net result was inevitable losses.

Lesson 5:Tomorrow is always a new day---think twice

Everybody believed that they lost money because of somebody else’s wrong recommendations and tomorrow they will have great tips from their favorite brokers. I was like if you are a sweets vendor how could you hope to survive if it is somebody else’s services that you hope to survive on.

Lesson 6:People don’t manage to learn from the mistakes—hope we manage to”

What I was confused the most about during my stint was they did the same thing day in and day out yet never tried to reason why did they lose money. There was always that third person culprit or bad luck as they call it if not anything else.

What of all these Lessons:

So during these 2 months I had my first profit, my first loss and lots of valuable lessons. I left the job because I needed to move on. I reached a basic conclusion “I wanted to become an investor not a speculator”.

This is one hell of an important lesson to learn and learn it at 19. It has been almost 2 years since I left this job and started my journey to become an investor. Last week I was in Mumbai. I requested somebody whom I know if it will be possible if I can sit at a BOLT just watching people trade for say 3 hours. He arranged for it and I again learnt an invaluable lesson which I will share with you in the next article, “Ruminations over Ten Baggers”


Blogger Known Stranger said...

Amazing. Just couldnt gasp at the clarity you have on investing. Nothing could give a good picture better than your words. Amazing. But some how i never felt of investing.

7:57 PM  
Blogger arpitranka said...

This comment has been removed by a blog administrator.

11:31 PM  
Blogger arpitranka said...

Thank You.
I agree with you when you say that nothing could give a better picture than your words because what connects our physical being to the world is our thoughts and words are one of those important means which can connect the two.
"You are because you think you are"
I hope you agree.

11:34 PM  
Blogger Knowledge Is Power said...

Good one Arpit.

There is nothing better than experience.

The best upside is you learn it first hand.

Main downside of experience as a teacher is it comes at a cost, sometimes more than you would/should pay.

Anyways Experience is one of the best teachers if we care to learn and listen.

Keep up the Good work!
Wish you all the best for 2006 and years ahead.

7:34 AM  
Blogger Investment Center said...

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1:03 PM  
Blogger Sandy said...

Hi Arpit,
I came across your blog and was reading it from bottom up. It has really got me hooked. I keep on thinking man, this guy at only 22 is awesome. Your clarity of thought and writing skills are amazing. Keep it up.
Like you I too got hooked on to value investing some time back. Although I have started reading on investing since only 6 months back. Our interests does sound similar. I too am an avid reader and Straight from the gut is one book that had a deep impact on my thinking. The same goes for intelligent investor, warren buffet way and security analysis.
Keep writing

12:36 AM  

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