- Sudarshan Kadariya*, New York
In last two decades, the advancement in science and in technology brought us various things that our grandparents would never imagine a century ago. Many the then impossible things are now possible and available at our figure tips and accessible everywhere in the global world at a real time. It has opened up the new way of thinking and doing business. On the other hand, such innovations have brought some new level challenges and threats in doing business such as changing definition of factory workers with the introduction of robots and robotics, Division of labor and automated assembly line has replaced most of the reoccurring nature of jobs, the machine learning has given a new threat to replace the administrative and data analytics jobs, algorithm, automated computer-based trading is replacing some financial jobs, etc. and further threats such as various kinds of cyber threats, geopolitical crisis, the changing nature and magnitude of financial crisis, unstable inflationary pressure in the economy, and, so on. The market economy is advancing day by day and it’s not going to let us live along in isolation since everything in our daily life have been changing with innovations including investing in the stock market.
For the financial community, those changes are rapid, very important, and it is powerful because it involves money in each activity. There is no option available for us other than exposing ourselves with those new developments. The only way to realize success is to learn new skills and to face new opportunities and challenges. Currently, we are here talking about internet based trading (in Nepal) and our readiness to change is important to make the novel applications favorable in investing.
In the Nepali Context, the online trading is going to be the next revolution and it will affect the trading performance of thousands of investors both beginners as well as who has already been in the market since a longtime. The long time investors have their own strong preset internal decision-making system that requires updates since the speed of flow of information is going to change very soon along with the changes the existing financial infrastructures. Online trading will be different than the existing mechanism; there will be more opportunities if we would prepare enough in advance. Equally, there will be a new level of risks. But, the good preparation on handling such risks by educating ourselves, learning from the experienced investors from the developed stock markets, and continuing discussions among the financial communities in the updates and upgrades will help.
The past performance will not always predict the future performances, what the market have done today isn't a reliable way to predict tomorrow, no one in the world can reliably predict the stock market, predicting the market is like predicting the future, and no one can predict the future correctly, etc. are some of the quotes that we have to familiar conceptually. But, the financial professionals can make their educated guesses based on their study on stock market behavior and sets of skills/expertize they gained from the market. In sum, we should not blindly believe in others’ predictions when it comes to the market. There are multiple situations in the market when all the market information is positive for a particular stock with sound fundamental strength but the price does not move as expected. There is no guarantee that good news always take the stock price to the new level and the bad news would always dip the prices down. The pricing mechanism always follows the demand and supply rule, the traditional school, no matter what sentiments hit the market. The market, in general, follows the herds or exhibits the collective behavior of the thousands of investors and their trading habits particularly when an individual investor can place his/her own trading orders by replacing existing roles of stock brokers with the introduction of online trading in Nepal. Anyone, who would like to enter into the stock market, should understand these stock market characteristics and at the same time should be familiar with the following investment basics:
- Investing involves risk:
Investing is dealing with the uncertainty; we do not know whether the return will be positive. There will not be any investment strategy that guarantees you to pay off interest rate on your loan as well as the level of risk that you are taking. There is no guaranteed that you will make money from investing. You could make or lose money with your timing of trading decisions. It is essential to sit down and look at your financial situation before making any investment decisions. Find out your investment goals and the level of risk tolerance. How much you can lose with less effect in your financial situation and how long would you be holding your investment once you purchase. Some professionals say that you shouldn't invest money if you'll need in the next five years because if the market goes down, you won't have enough time to recover those funds. But, if you understand the facts about saving and investing, you could able to gain financial success in the long run and enjoy the benefits of managing your own money.
- Expertise in investment:
Every beginner thinks that you require the expertise while investing including myself when I picked my first investment but that incorrect. The investing knowledge you will achieve gradually with your constant trades since there are millions of situations in the market so that nobody understands all context in the market. You don't have to go at it alone, you could take a time to learn how the market works, how the various elements of the market influence the stock performances. Now, there are numbers of financial market training institutions available in the market to train you on investing basics. Moreover, investing is more about gaining knowledge and skills by practice rather than reading theories alone. Obviously, the study helps you to strengthen your fundamental skills and expand your existing boundaries of knowledge. Continuing study on investing basics, investment strategies, and investing tips, etc. would take you to the next level of expertise.
- Starting investing early:
If you are the 20s, it’s the best time to start investing and if you are 30 and above, it is essential to start investing to grow your money with compound interest. Growing money is important to cover the inflation and use for retirement, children education, and family support and in other financial needs. The biggest asset in the market is TIME! If you invest early you will have more time to compound your investment. Also, if your portfolio is performing lesser than expected or if you are losing money in the market, you need the patience to keep your investment unchanged for relatively a long period of time to recover and to grow. "It’s too late to start investing" is not an excuse to keep your money ideal and it’s better to start investing even if it is relatively late.
- Investment objectives before to start:
Why are you investing for? What is (are) the written specific objective(s) of your investments? Knowing investment objectives is very important to the investors. Your goals help you to guide your investment decisions. It gives you a framework of investing. It also helps you to figure out how to start investing with your hard earned money and how long to leave it on the market aiming to grow. If you set up the destination, you will reach there sooner or later but if you failed to set the goals, you would be diverted and never reach the level that your mind thought off. Many investors not only failed in investing but most of them failed to set up their investment goals.
- Building an investing strategy:
Do you have sufficient time to analyze the available investment opportunities in the market? How to develop a suitable investment strategy? How to implement them? Etc. are the types of questions in your mind. To solve the similar questions, you may need a financial mentor, advisor, or, you can do it on your own. If you belong to the other professions than finance; you may need more time to learn, understand, and to develop a right, a suitable strategy which is essential in investing. More importantly, you also have to set up your investment horizon i.e. you should have a clear idea on how long you are going to keep your money in the market? In general, if you are investing for the long term, you would be taking a high risk of uncertainty and if you are investing for short term, you would have less time to compound. Thus, the suitable time framing is important in investing.
- Maintain a portfolio:
The portfolio is an integrated whole of your individual investments and the diversification of your portfolio is a simple and useful concept of investing i.e. putting your money in different investment alternatives. The most popular quote in diversification is "Don't put all of your eggs in one basket" is self-explanatory. You may compose to invest in cash, bonds, shares, or, you can put your money into mutual funds.
- Controlling emotions:
Fear, greed, sentiments, overreactions, nervousness, values, psychology, etc. are very important to understand before taking investments decisions. All these behavioral factors constantly move along with your investments. Most of the time, these intangibles govern you and your investment performances. Keeping these emotions side while making investment decisions is not possible for most of the investors but to become a rational investor, you have to practice to separate them out from investing particularly fear and greed sentiments. One of the best things you can do is to leave your investments alone. Short-term rises and falls are inevitable in the market. As a financial practitioner, you have to practice controlling your emotions and have to do “Sadhana” for perfection like as by many other professionals – singers, athletes, artists, etc.
- Adjustments and portfolio updates:
As stated, you should keep your investment until your investment horizon. Some of the elements of your portfolio might perform well similarly some will not. Genuinely, you could reap the benefits of ripen investment by selling them and adjust the position of a bad performer at the same time you can add some potential movers in your portfolio. Certainly, if there are big changes occurred in the market then you can adjust your portfolio accordingly or you can also reevaluate your investment horizon to make them situational.
Bottom line:
As discussed above, some of the basic elements of the stock market that we should understand before involving into the market. Understand the risk, start investing early, developing the sound financial goals, investing strategy, a formation of a portfolio, controlling emotions, and portfolio adjustments and updates are some of the basic elements of investing. It is the fact that nobody gets the benefits of success without his/her significant efforts and without experiencing failures. Even the richest persons in the world do have dozens of examples of major failures in their career. Success and failure are just two sides of a coin. Most importantly, starting to invest is a first milestone in the investment path then the results of the investment as stated earlier could be profit, loss or the breakeven. On the other hand, inflation is a silent killer and the investment is very crucial to combat those inflationary effects on wealth. At least to maintain the purchasing power of money that we have today against the current close to double digits inflation situation, we require a sound investment strategy on top of a strong financial foundation, otherwise, the worth of Rs. 1000 today will not worth Rs. 1000 next year and it will further deteriorate in subsequent years. As a result, we will be losing money by keeping it into the bank saving account with lower than the inflation bank interest rate. Therefore, we should understand the importance of investing and we should enhance our skills of investing in the changing scenario.
(*the author is a Gold medalist in M. Phil in Management with specialization in Finance in 2012, Tribhuvan University. Now, he is working for a consulting firm in New York. The opinion presented in the article is personal. You can reach to the author at su.kadariya@gmail.com)
