Hello, friends in today’s article we see chapter 3 from the book, Stocks to riches. In this chapter, we learn three ways of investing. let’s see them one by one.
Three Ways of Investing:-
there are three ways by which an investor can invest to achieve superior results.
1) Intellectually Difficult
2) Physically difficult
3) Emotionally difficult
let’s see first is an Intellectually difficult path
The Intellectually Difficult Path:-
the author says, “An investor like Warren Buffett, Charlie Munger, John Templeton, and a few others have taken the intellectually difficult path of beating the markets. this path is pursued by those who have a profound understanding of investing can see future trends clearly, and can comprehend business and the environment. they know that Patience is a virtue and therefore take a long-term position.
We admire them but usually in retrospect initially, we may see them as being misguided but that is only because of our inability to grasp their point of view.”
then the author explains the method that helps this big investor to become big.
this method’s name is cashflow.
Those are big investors, they see how businesses work, their economic policies and market forces that affect the business environment, and how businesses show the cash flow. So this is the most difficult path, and it required a keen mind to study the different concepts of investing.
the author says, ” A good grasp of the various fields of management is required to understand the organizations and their ability to capitalize on various business opportunities. Good knowledge of the field of liberal analysis is basic to the development of various investment concepts.” (Ways of Investing)
then the author explains the name of the game in investing to get a superior return.
the author says, ” Here the name of the game is Patience. Such investors are always on the lookout for good opportunities and bargain prices. As long-term investors, they are willing to wait for them. they are not perturbed by events news rumors and gossip that create short-term volatilities.
They have a strong belief in their abilities since their goal is investing long-term for cashflows. As against capital gains, they are in no hurry to invest. They strongly believe that opportunities are always there but that when the biggest of them come, one must have the money to invest.
They are therefore very careful about allocating resources. They never buy on impulse. They can be out of the market for months, even years. they have the patience to wait till the right moment. Brokers usually do not like such investors as they do not churn their portfolios regularly.”
Then the author explains Intellectually investor qualities.
the author says,” Intellectually investors are also emotionally strong. that is the reason they are able to exercise such restraint.
we all want to be such investors but we cannot as we believe that we are not allowed intellectually blessed as they are. This is a wrong notion. the reason they are intellectually capable is that they work hard and make effort to reach that stage.
They constantly explore opportunities by talking with management, examining different viewpoints on business, trying to understand economic policies and their effect on business environments, etc.
their intellectual capability is derived from their hard work and their strong belief in the long-term approach to investments. Moreover, they use common sense in their judgments and are not swayed by rumors.” (Ways of Investing)
so these types of intellectual qualities you should practice to get a superior return.
then author talk about the second difficult path is The physically difficult path,
The Physically Difficult Path:-
then the author explains, how we have to do work physically to get the proper investment opportunities, for that author gives the following explanation.
the author says, ” Most people are deeply involved in the physically difficult way of beating the market. they come early to the office and stay late. they do not know what their children are doing as they don’t have time for them.”
the author explains the whole things that regularly fund manager does each and every day of life. And this type of doing is the same as the other fund manager is doing.
then the author explains, why these people do this, and also gives their own experience on the physically difficult path.
the author says, ” In my experience, in the stock market dealing with fund managers has been really amusing. they sincerely believe that keeping themselves busy this way makes them look important and increases their ability to pick up the winners. Once I was at the office of a fund manager and we were chatting informally The telephone rang but he did not answer it. after a couple of rings, the call went to the answering machine. This is how most of them behave. show the world they are busy.”
then author explains how the day trader has also a physically difficult pathway.
the author says, ” the day traders also take the physically difficult path of investing. they spend the entire day collecting information and making decisions based on that information. (Ways of Investing)
so, with all the fund managers and the day trader trading the same path, how can any one of them achieve better results.?”
then author explains how good opportunities come, and what we have to do physically difficult path.
the author says, ” Good opportunities come once in a while and you spot them only when you are cool and have the time to think. The physically difficult path is based on the assumption that there are a lot of opportunities out there and you have to keep digging hard to be successful at investing. the current volatility in the market is the result of too many people trying to invest by this method.”
Life is simple. we make it complicated.
then the author explains the third difficult path and its most important and difficult path, if you master this way of investing then you are 90 percent ready to get a superior return.
The emotionally difficult Path:-
the author says, ” Most of us may find the intellectually and the physically difficult paths too daunting. In that case, we could opt for what is called the emotionally difficult path. Actually, this path is very straightforward. Simply work out, a long-term investment policy that is right for you and be committed to it.”
then the author explains how people think and act on the television news and rumors happening in newspapers, you can read, by ordering this book, link in below image.
after this author gives one example
the author says, ” If one were to compound money at a modest rate of seven percent the money would double at the end of 10 years and it would be 16 times at the end of 40 years.
Patience also helps you to control transaction costs. the more you churn your portfolio the more you pay the broker in terms of brokerage and of course the government in terms of taxes on your capital gains.
then you also have costs like depository charges, transactions tax, and service tax. all these costs would be avoided if one has Patience.
The emotionally difficult path requires an understanding of how our emotions guide our decision making especially when we deal with money. Our emotions directly affect our decisions on investments and expenditures.
We have to learn to think with our emotions rather than have our emotions do the thinking. understanding our own anomalies as also that of others will help us become better investors.” (Ways of Investing)
In the next fourth chapter, we will learn how to use our emotions to our benefit.
lastly, the author explains why is investing so difficult.
Why is investing so difficult:-
the author says, ” the most difficult part of investing is understanding the behavior of the stock markets. Market fluctuations are based on the varied opinions expressed by its participants, which in turn are subject to change commensurate with the changing sentiments of people.
it’s the crowd behavior that dominates the decision making and it is responsible for the sudden changes in the sentiments. take for instance.
The black Monday in May 2004. the markets lost around 700 points when the elections brought Congress to power.
What precipitated this huge fall? had anything gone drastically wrong with the performance of the companies whose stock prices crashed?
Definitely not. but the sentiments changed the BJP being voted out of power was a big change and normally we do not like changes.
Hence there was gloom all around and people dumped stocks as though there was no future. The herd mentality was at work and the markets crashed as each one wanted to get out faster than his neighbor.
If you were emotionally strong and you had bought when the others were panicking, you would have ended up making a huge fortune. (Ways of Investing)
But this seems easy only in hindsight. At that point in time going against the crowd is the most difficult but the most sensible thing to do. Understanding behavioral science is the key to success in this financial market. Its application not only helps you control your emotions but also helps you to understand others’ emotions and benefits from their mistakes.”
On emotion, Warren Buffett has a quote
“ If you can’t control your emotion, then you can’t control your Money”
so emotion is the main part of investing.
so this is all about the ways of investing from the book, ” Stocks to riches ” by Parag Parikh