The term “investing” may have varied interpretations, but the aim should be one and clear — an investment should generate returns.
Why “investing” and why is this term gaining so much prominence in our day-to-day life? A question that is very frequently asked or heard of, thanks to the accessibility of information and content on the world wide web and social media. An investor tends to invest savings with the aim of generating additional income, famously tagged as “second income”. A portfolio is gradually built keeping a long term investment horizon.
Let’s interpret this nine-letter word “investing” by extending this term using five separate words.
IN could be interpreted as ‘infancy’. An investor always starts a journey at the stage of infancy. Generally, an investor’s journey is always progressive and modest. Similarly, the share price of a company does not multiply on the very first day when the shares are listed. Prices rising from two to three digits or three to four digits take time before a small-cap stock becomes a mid-cap stock or a mid-cap stock becomes a large-cap stock and the company stock eventually turns a multi-bagger for an investor. An investor should be scouting for such opportunities and looking for companies that may eventually scale up their operations and increase profitability that would also act as a catalyst to a rise in share prices.
Explore the financial world. The real cake is below the icing. Index funds (generally considered as benchmark for evaluating returns) for every financial market has top 20, 30, 50 or 100 companies within the fund and the local markets track performance of these index funds as benchmark. For any market, it is not the top 20 or 30 or 50 or 100 companies solely that drive the country’s performance. There are hundreds of companies below these large-cap ones, in the mid-cap and small-cap space that may have value and more potential to grow. In the process of identifying such companies, start gradually and follow the rules laid down considering volatility in markets and limiting exposure to the extent that the portfolio discipline permits.
VES represents ‘vested interest’ of the investor. Invest while protecting your own vested interest. The investor should take care of their own interest and rely on their own presumption, assumption and analysis. In the process of analysing and evaluating data, bias for any company or sector should be avoided. Ultimately, any resultant profit or loss from the investment is solely for the investor. Any decision for investment, whether buy or sell, should always be initiated keeping in view the vested interest. It’s all to do with hard earned money that is being invested, limiting the risk and protecting capital.
T represents ‘technical analysis’ of charts and price movements of any investment using trendlines and other tools available. This technique of using tools and trendlines to carry out technical analysis is only mastered through regular learning. An investor continues to be a learner life long and this learning journey is unstoppable.
Every new dawn brings new lessons that enrich experience. Continuous learning and practice eventually sharpen an investor’s ability to evaluate price movements. An investor may shortlist several opportunities through technical analysis and then choose preferred option to invest their funds.
IN stands for ‘income’. An investor invests funds with the intent to earn Income. Income could be in terms of recurring payout at periodic intervals or gains from sale of purchased investments. Investment income is never a primary source of income and should only be considered as a source of additional flow of funds. Income realised physically may be partially reinvested in hard assets that would stay with the investor life long and act as a shield for the investor in case of any unforeseen risks.
G stands for ‘growth’. Funds placed in various investment options are a part of the overall investment portfolio. Value of this portfolio should eventually grow over time and the growth ideally should exceed annual inflation rate. Setting realistic goals and targets for growth of the investment portfolio and regular analysis at periodic intervals should be a philosophy that investors may adopt.
A word of caution here: Staying away from speculation is extremely vital. Financial markets are such an ecosystem wherein hundreds of thousands join this journey to earn millions and end up losing thousands, if not cautious. Stay awake, keep your eyes and ears open, opportunities will keep flowing. Continue to filter opportunities and follow the process.
Investing is a continuous journey where an investor remains invested following the set process to earn income. Deviation from pre-decided principles will only bring in early exit, that may not be beneficial.
In this journey, not everyone becomes a millionaire. Like the Alphabet A, even though being the first letter of the alphabet, A does not have a place between ‘one’ and ‘nine hundred ninety-nine’ and gets a spot only in the word ‘thousand’. Similarly, you have to wait for your turn till you spot the letter A in the word ‘ThousAnd’. Patience and discipline are vital in this journey. While driving through the tunnel, only patience and discipline will assist an investor to reach the end of the tunnel where there is light.
Best wishes for the investors while they continue saving for future and invest part of these funds to generate returns, while safeguarding their capital.
Dhaval Jasani is CEO of ZTI Global.