Investment and Eating/Food are majorly related. Like if you gulp your food when you are hungry and end up with an upset stomach, so too investment made irrationally and fast could end up with a loss.
Thus what and how you eat is a lesson for what and how you invest. If you read and eat healthy, you remain in the pink of your health and if you invest wisely after reading a lot, you also ensure that the stocks you invest in remains healthy.
Another allegory is that if you take time to cook food and you are a good cook, the dish comes out well else it is burnt or too oily, salty, spicy etc. Similarly, if you invest doing financial analysis, technical analysis and various other methods of investing, you are likely to be a winner.
For those who do not know how to cook or cannot spend sufficient time, there is the ready made mixes available in the stores and similarly those who do not how to invest, there is the ready made mix in the form of Mutual Funds. Regularly invest and you could end up having a substantial healthy corpus end of 20-30 years.
Many of the chefs you see the videos of, use the mantra of keeping cooking simple to get the best dish. So too is investment recipe- keep it simple and your investment is done.
Some of the food that comes out well requires a lot of time- eg Thertipal (or the milk sweet). Recipe is simple - Milk + Sugar. But it is kept in a slow flame for a couple of hours to get the dish made. Investment in the form of regular SIPs could get you a substantial corpus end of 20-30 years.
Further, just like cooking some dish may come out very well, while some dish may be a total failure, investment also will have this- some may turn out duds and some may turn out to be a chicken that lays the golden egg.
Like cooking, if you have money and can afford to waste a recipe by experimenting, so too in investment if you have extra money you can take a risk of investing in a tweaked or different manner. Some by studying technical analysis (not fundamental analysis) do what is called sectoral rotation. This is like when you cook, you do not want Daal Chawal every day. You keep changing the dish daily. In investment, though not daily, you study the market and see if the flavor (momentum) is in Banking sector or Pharma or IT sector, you jump into the band wagon and make your money.
Another aspect of the flavor of the season is certain restaurants become popular for a short period of time and then fade away to be replaced by another. Alternatively, we have Burger king, Pizza hut, Mcdonalds which are a steady standard fare and been long. Investments in large stocks are like these steady standard fare with alpha (meaning getting a return higher than standard) coming from investment that is the flavor (momentum) of the month. Eg, in Chennai, there is a restaurant called Kaidhi (Jailed -loosely translated). The ambience is like you are in a jail and eating it. You may visit a couple of times, but will not go regularly there, but since everyone is talking about it, it will be full for a couple of seasons and then just fall of the cliff. Patti veedu (grandmother house) is another one. Thus investment in Sectoral is like these- in flavor for a few months and then just fall off. Either you should be shrewd and tracking your investment or let the Mutual fund do it for you in a flexi cap or multi asset fund.
Another aspect of this comparison between food and investing is you regularly flush your system with a laxative, asset allocation or revisiting your investments once a year is the laxative. You remove the duds and stock up on the good investment.
Having said all these, one should know that investment like food and its reaction is dependent on various factors and one cannot be accurate 100% of the time. Some may suit your taste buds, some may give you allergy, some may give you upset stomach. Like that, you take risks with investment. Even big big investors take risks to generate alpha and it may end up as a flop, but since they have so much of investment, it is taken care of others.
Dr. Velumani of Thryrocare firm said in one interview that he got 4500 crores when he went for IPO of his company and he put 1500 crores in a private equity and now its value is 150 crores. And private equity is supposed to be filled with brainy financial analysts and MBAs doing a lot of research, but still they failed. The reason is it is impossible to predict the behavioral nature of human being. A company doing 20% CAGR for last 10 years may suddenly fail, because of some change in technology eg. Companies that used to hire videos to homes suddenly found themselves out of business due to cable companies. Similarly, cable companies are now getting out of business because of streaming. Who knows what is in store in future.
This brings us to the point of Diversification. Eating same oily Samosas day in and day out, just because you like it can lead to health issues. So too investing only in one type of stock can give you a loss or pain. For Simple investors investment should be a bit diversified like some in FD, some in Gold, Some in Debt and some in equity. Equity is the most risky, but will get you a better alpha.
As I had talked about sectoral investment and some do a sectoral churning investment, for an ordinary investor sectoral churning may not be the right thing but sectoral investment as a method of diversification is a good technique.Examples of various type of sectors are listed below:
a) Banks
b) Pharma
c) IT
d) Auto
e) FMCG
f) Power
g) Medical hospitals
h)Chemical
i) Real Estate
Some follow the principle of taking top 2-3 companies in each sector and investing regularly in them to catch the ups and downs of sectoral rotation and at the same time ensure Safe and steady investments. As per various studies it is found that you could get 10-15% in Safe and steady investments and with risk taking can get you 25-30%. But this is the average and should be treated carefully. You may fall at either end of a normal curve if luck is not in your favor.
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