10 Investment lessons one can learn from Chanakya
Chanakya needs no introduction to followers of the Indian management doctrines. As the most trust advisor of King Chandragupta Maurya, Chanakya was a strategist par excellence. Some of his ideas expressed in the 04th Century BC are still revered as management axioms. Chanakya management lessons are nothing new but did you know that there are also some very sharp investment lessons one can glean from Chanakya? Even as you seek financial advice from experts, here is a man from Indian history, who probably is head and shoulders above the rest when it comes to strategy. Here are 10 investment lessons from Chanakya..
Never start without adequate planning
This is one of the cardinal lessons of investing. Before you start investing, evaluate your risk capacity, your return requirement, your tax liabilities and your liquidity preferences. If you jump into investing without evaluating these four quadrants, it is a case of poor planning. As we have seen time and again; you start with poor planning in investments and you are bound to be disappointed. After all, if you do not know where you are headed, it really does not matter how fast you run!
Decide your work and action based on your capacity
We can call that risk-appetite in investment parlance. Never jump into a trade or into an instrument unless you are fully conscious of the downside risks. Do you have the financial and the mental capacity to bear these risks? Plan your investment strategy based on your risk-taking capacity; else you are likely to end up on the wrong side of returns.
When you have a choice, focus on sustainable value
This is a typical problem when you try to invest in BSE listed stocks because there is just so much choice. The answer is to focus on sustainable value. Don’t worry about what a company is doing today but worry what a company will do 5 years or 10 years down the line! If you have the conviction that the company can outperform in the future then that is where you must commit your money. Investing is all about sustainable value!
Wealth abandons you if you don't examine opportunities
This is a problem most of us have faced at some of time while investing. You indulge in aggressive trading in a good market and end the year with 40% returns. You are delighted but you will be disappointed to know that you would have earned the same kind of returns by investing in passive equity funds. Now that is a classic waste of active investing. If you jump into an investment decision without examining the choices, you are bound to make sub-optimal decisions.
Your action should be ultimately guided by your goals
Chanakya puts it very poetically, "If you want milk, then why buy an elephant". Understand the bigger picture here. If you are looking at higher returns then you need to invest in higher beta stocks. But if you are looking at stable returns around the index returns, then why worry about taking on stock risk at all? You are probably better off just buying passive index funds and that can serve your purpose quite well. Plan your strategy according to the goal in mind.
Don't have to touch the fire to feel the heat
This is a classic learning for traders and for investors. You can learn a lot by just observing. When someone makes a mistake in the market, the smart investor learns from it. You do not need to commit the same mistake and pay the price all over again. If you see people consistently losing their money in small cap penny stocks, they why take that risk at all. In management, as in investments, lessons have a huge price and is best learnt by observing.
Face your fears head-on
We all know that greed and fear are the two driving forces of the stock market. The same applies to your investments. You may get too fearful when the index is at an all time low and trading at around 10 times P/E. We saw that in 2009 but were extremely fearful. Similarly, you get out of a long term story like Eicher too soon just because you are afraid. These are the kinds of fears that you need to confront head-on if you want to be a successful investor.
Everything does teach you something
That is true. Nothing is really worthless. Your smallest experiences in the market, your most unrelated learnings may all have a larger lesson for you. There are lessons in investing all around. Just keep your ears and eyes open to absorb them and assimilating them into your investment strategy.
Always bet on the youth and the future
What could be the big outperformers of the next 10 years? Obviously, a company with a market cap of $50 billion will find it hard to multiply wealth. You therefore focus on young sectors, young companies and futuristic ideas. That is the way mid-caps like Eicher, Motherson Sumi, Britannia and Lupin became large caps and created tremendous wealth in the process. Bet on the young story!
Work hard; Work hard; Work hard
Finally, that is what it all boils down to. The best of investors in the world are extremely diligent and hard working. There is really no alternative. You need to read a lot, collect a lot of information, assimilate and distil the information, then apply your analytical skills and experience and that is how you become a good investor. Remember, investing is a full time job and there is no alternative to grinding hard work.
Chanakya offers some mind-bogglingly simple yet profound lessons that all investors can apply. It is all about combining the best of India's traditional wisdom to the modern art of wealth creation!