How to become rich: You must manage your own money

BOOK REVIEW: The Rich Investor: How to Avoid Common Investing Mistakes and Build Wealth. By Arjun Parthasarathy. Vision Books, 160 pages, Price Rs 225.

How-to investment books are a dime a dozen. However, they all have a common failing: they tend to perpetuate the myth that investing is a breeze. They offer simple formulae like asset allocation or diversification or trite phrases (Buy low, sell high, Never Try To Time the Market, etc) to give the investor a false sense of empowerment.

Arjun Parthasarathy's book will bring you down to earth with a thud. It does not offer you a quick-fix to get your sinking portfolio up and running again, but it does offer you sober advice. His philosophy is that only you can really make your money grow.

The book does not offer you a quick-fix to get your sinking portfolio up and running again, but it does offer you sober advice.

If you are lazy, and depend on tipsters, or brokerage reports, or mutual funds or portfolio management schemes to manage your money, you may indeed make some money, but that would be because you were lucky. But more often than not, you will end up making money for someone else - the promoters of the company you are investing in, the asset management company that runs your mutual fund, the insurance company whose ULIPs you have bought, or the broker who recommended a stock as a multi-bagger when it was heading south.

As Parthasarathy observes, "Every unsuccessful investment by an investor profits somebody else." In short, the unwary investor makes a fool of himself by entrusting his money to others without even bothering to see if it's working for him.

Parthasarathy, who runs a website called investorsareidiots.com and is also a regular contributor to Firstpost, makes it clear that investment is not something you can afford to sleep over. You may have selected a good fund manager based on his past track record, but you cannot then head for the hills and hope that your money would have grown when you return.

Here are few tips from Parthasarathy that could prove useful.

How, for example, do you pick a fund manager? On the basis of past track record or strong sales pitches? The answer: find one with the right investing philosophy for your needs. If you are comfortable only with the Warren Buffett style of investing, find a fund manager who echoes the same ideas.

What, for example, is the most important question you need to ask yourself while investing in any avenue - whether it is fixed deposits or stocks or mutual funds or real estate?

If your answer is that I haven't figured out what to do with my money, and hence it is in the fixed deposit, you've flunked Parthasarathy's quiz. Your money should be in an FD (or real estate, or gold) only because you think it is the right time to be in this asset and it will give you better returns than others.

And how do you respond to the time-worn clich that "Time in the market is more important than timing the market". Whoever said that probably wants to take your money and hopes never to see you again. He is serving only himself.

In fact, timing is the key to all returns. As Parthasarathy points out, there are golden periods and barren periods for investing. Investors who bought the Sensex in the early to mid-1990s - the years immediately after reforms - saw poor (or even negative) returns for three- and five-year periods. Ten-year returns were best for those who bought in the late 1990s rather than the early 1990s.

Of course, no one can time the markets perfectly. But two simple ways to figure out if the timing is right are these. One is the Buffett principle: be greedy when the rest of the market is fearful; and be fearful when everyone is sure the market is going to keep rising forever.

The second point is to listen to your own instincts. Parthasarathy makes the counter-intuitive point that you know best when the situation is right. For example, have you been getting good job offers, or are friends getting good pay hikes? Do you see malls overflowing with buyers or just gawkers? Are you beginning to wonder where to invest your surpluses? These would be usually the right time to buy.

On the other hand, when houses are not selling, and you have to work harder for promotions and increments, or when you hear of companies laying off people, it is probably a good time to think of selling - especially stocks.

Parthasarathy's other bits of advice include these:

Don't listen too much to pundits, or follow other investors. Following the herd is not a great way to make money. You are more likely to be caught in a stampede.

Don't ignore what you see in front of you. When property is soaring like a rocket, you should check if a bubble is building. If a Rs 2 stock of a loss-making company suddenly becomes Rs 12, it's a big gain. But penny stocks may just be promoter-laid traps.

Simplify your investments, and don't follow flavours of the season. There is no need to invest in everything from equity to mutual funds to gold and real estate and debt funds just to feel safe. What matters is which asset class you are most comfortable with and which ones you think you can easily track. Just spreading the money around makes it almost impossible to track, for each asset class has to be tracked separately.

The bottomline: You are the best judge of your investments. So don't depend on anyone you can't trust.


Published Date: Jul 17, 2012 12:33 pm | Updated Date: Dec 20, 2014 06:45 pm

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