Share prices are scaling dizzy heights. That is perhaps an understatement if we go back just over a year and look up. Investors are turning a blind eye to the second wave of the COVID-19 pandemic and the economic hardship it is bringing to everyday lives. The year 2020-21 went down in history as the worst year for economic growth. However, there is something that investors see ahead that most individuals in India do not see.
After all, if everyone had the same information, most of you would have invested in the stock market on 22 March 2020 when share prices hit bottom.With a bull market, there are stories. They start with something like ‘Had you invested xx in ABC company a few months or years ago and end with ‘you would have been a millionaire by now.’
The other set of stories would be about fear of missing out or FOMO. ‘You are missing out on a rally of a lifetime’ or ‘Young people are making money, where are you?’ are some examples. These stories are perhaps true. This column has mentioned such ideas before to explain why investing is more important than just saving money.
Those who are actively trading in the stock market would continue doing it. However, this week’s message is more for those fence-sitters. You are watching something spectacular unfolding. But there are a few things you need to bear in mind before you take that first step to cross the fence.
There is a lot of information asymmetry. Those active in the market know what it takes to make money and lose money. They have a history and sense of it too. They have access to data, and they know more about risk than you do.
But talk to any stockbroker, and they will say that only 20 per cent of the total registered investors are actively trading in the market. That number may not be more than 60 or 70 lakh. That is a relatively small number if you consider crores of people in the middle class in India.
That does not mean you need to sit out too. The only way out is to make yourself aware of things. While it is nearly impossible to know it all, you must learn about valuable information that could drive you
towards rationality. For example, several authors have said that money makes us all emotional. To explain, Nobel laureate Daniel Kahneman writes in his book ‘Thinking fast and slow’ that our brain has two sets of cognitive settings.
The default one is the ‘fast thinking mode. The last bit of our brain takes decisions for us. Our response to a situation is instantaneous. That fast-thinking setting dictates it. He argues that our brain takes 60 per cent of our decisions this way. But, our brain also has a ‘slow thinking’ ability. It rationalises events and prompts a measured response. We can use our ‘slow thinking’ part of the brain more than the ‘fast thinking’ that can lead to better financial decisions.
That is needed in personal finance. Emotions play a significant part in Indian households when it comes to money. A survey by the RBI committee on Household Finance revealed that most households did not have any retirement plans a few years ago. Instead, their retirement plans depend on the success of their children.
Letting your slow thinking work does not mean you remain a fence sitter for life. On the contrary, investing your money in equity assets over the long term is the best way to create wealth.
What you can do
If you are a new investor, you must take your time. Analysing your saving, investing and spending habits is the first step-each one of those feeds into the other. Setting financial goals and a structured investment approach is the next step. There is a lot of literature online on personal finance. You can watch videos, read books or follow influential people to know more about the three critical pillars of your money. The other thing to do is get a professional financial advisor. The important thing is to get your mind over money and not the other way round.
(The author is editor-in-chief at www.moneyminute.in)