The writer lists out attributes that makes for a profitable long-term investment proposition.
Many folks that I come across – students, executives, officers, colleagues, acquaintances, retirees, men and women, ask me this question, “What makes a good investor?” I am sure, more people I haven’t met would be seeking an answer! In this article, I explain why one should invest and what are the key characteristics of a good investor.
Investment is an activity by which it is possible to grow one’s wealth. Investing is different from the plain vanilla ‘savings’! Typically, we save in the ‘savings bank account’, at a rate less than the inflation rate. Although ‘fixed deposits’ (FDs) give higher returns, we seldom take advantage of the options available. Those who do this, consciously, are‘investing’.
Looking for higher returns and working towards achieving it is paramount to an investor. While choosing FDs, one should look for better options. FD rates differ for different periods. The rates are highly negotiable, too. If we haggle while spending on vegetables, why not exhibit the same calibre in investing. Further, we could bargain for higher rates in other banks. However, let’s not get lured by higher rates offered by credit co-operative societies etc. We may be inviting higher risk.
To understand ‘Why we should invest?’ let us do a time travel. For instance, our date of retirment. Once we hang our boots, our active income will become zero. But our expenses on food, medicine, clothes, travel and data will continue. How do we ensure that we have financial freedom? It is possible only if we plan now and invest.
While investing, we should ensure that returns exceed rate of inflation to protect our purchasing power. Since interest rates have plummeted, investing in the stock market re-emerges as a better choice. Many are scared of the term ‘stock market’ and consider it akin to gambling. The truth is, it is not!
Buying and selling of shares is not investing, it is trading. It involves an entirely different science. In trading, unless you have an in-depth understanding of the market micro-structure. Losing your money is very easy.
Investing is always done for a long period. How long should be the ‘long-period’? The answer is, “as long as possible”. People ask me “when to sell?” My standard reply is “why to sell? If you are in dire need, sell now.”
The other characteristics of a good investor are: (1) Goal-oriented: We define our goals by answering the question – What amount of a retirement corpus do we wish to have? (2) Disciplined: To be a disciplined investor, is to invest systematically (Systematic Investment Plan). Ensuring that we do not miss any SIP investment is a very good discipline. (3) Patient: We must give time for the investment to grow – similar to watering a plant and waiting for it to bear fruits. (4) Diligent: Be very careful on all that we do. We should be making constant efforts to do things the right way. e.g., as a beginner, we should focus on large companies. Research has proven that risk is less in large companies as compared to smaller companies.
And finally, (5) Eager to learn: One should be very keen to learn, at least, about the assets that we invest in. For example, if we have invested in Infosys Ltd., we should learn about the company’s performance, the risk involved and its expected future. Similarly, if we have invested in mutual funds, we should learn about their risk-return characteristics. One may say that this is difficult. But, my advice on this is, “If we don’t work for our own money, who will?”
Understanding the risk-return characteristics of different assets will bring more clarity. In doing so, two choices with us are, “become an expert or employ experts!” Since we may be short of time, engaging experts is a better choice. Consulting an investment (wealth) advisor is sensible. Professional advisors charge a small fee, and it is okay to pay. We pay a fee for consulting a doctor for our health, then why not for wealth?!
So, how does one start? (1) Start by saving regularly; (2) Convert the savings to investments, (3) Look at long-term investments.
Best wishes for your investment journey! Be healthy and wealthy!
Amiya Sahu teaches at Goa Institute of Management. Email: amiyasahu@gim.ac.in
