One of the biggest complaints I’ve heard from investors is that they were not able to make a gain when the IPO they invested in opened on the stock exchange. We need to get people more aware about what an IPO is really about and what an investor is really about. If the investor looks at the stock ticker and every three minutes and feels he’s lost or gained, he is not an investor. Then, he’s looking at it as a trader. Investors need to look at five things.
One, they need to keep away from all the tips that say this share will rise tomorrow or that will fall. They need to necessarily take a long term view because they are not traders. The fact is nobody can time the market. You need to invest on a long-term basis. Once the timing is clear — that you are a long-term investor — find reliable companies which have performed over a period of time because you are going to lock up your money for five or 10 years.
Two, and as corollary to the above, if you’re going to lock up your money for such a long time, then obviously you can’t put all your savings there. Only put that part of your savings that you can afford to keep locked up. If you need money one year later, you don’t know where the market will be. It might not give you profits you expect and you may have to sell in distress. So, it has to be relatively patient money.
Three, since equity is a risky investment, people need to do understand that it has to match you risk profile. So, if you are a young man, with 30 years of working life before you during which you will continue to earn money, there are opportunities even if you make a loss — it will not make a dent in your life. But if you’re an old man and pension is your only source of income, then obviously a large part of your savings should not be in capital markets. It may differ from person to person, but it will certainly not be what you could have put when you were young.
Four, do not leverage yourself to invest. People borrow money and invest, thinking that since something has doubled in the last six months, it will double in the next six months. That need not be the case. The investment could halve. And what you will be left with is to repay your loan and the interest. This is not what investors should be doing. But human greed sometimes takes over.
And five, while investing in equities, you may have to rely on somebody’s advice. It’s not possible for everybody to become a financial expert. Even literate people, a great software writer for instance, don’t necessarily understand capital markets. As long as you have checked the credentials of the adviser and know that he’s not gaining anything from that advice except what you’ve paid him, there is no harm. Getting an equity exposure rather than buying equities through mutual funds could be one way of initiation in the area of equity investing.
The writer is chairman, Securities and Exchange Board of India