Become an Investment Scientist: Take Investment Decisions by Self

Taking investment decisions by self makes most people uncomfortable. Why?

Because of two reasons:

  1. They think, “others know better”. 
  2. “Thinking investment” is tiring. 

But this is a critical “factual error”. Why? Because nobody else will handle your money better than you. 

The point is, taking investment decision by self is key. It is our money.

Who care the most for our money? It is only “us” and nobody else.

Other can give only casual advice, or worse, self-benefiting advice. 

This is what has been going around in the market.

A whole business model has been setup around “investment advisory services”.

Who are these “investment advisors”?

They must be unique people, right?

Me and you do not know much about investment.

So people who claim they know it, must be “unique”.

But the reality is not like this.

People who are presented as “investment advisors”, in most cases, are as novice as us. 

Who can give investment advice?

  • People who themselves practice investment to its core. 
  • People who have made mistakes and learnt this skill the hard way. 
  • People whose “investment portfolio” is their teacher. 

Their investment portfolio is also their “lab”. 

They do all testing in their labs and learn from the hits and misses. 

This is the only way one can learn investment, and in turn qualify to become an investment advisor. 

This way people not only become investors, they also transform themselves into “investment scientists“.

Did you get my point?

Very few in this world can qualify to become a “real investment advisor”.

People who are making a living out of “investment advisory services” are people who are not as reliable as we think.

Who is more reliable? Oneself.

How to do it oneself? Read, implement, make mistakes, learn and then read more…

Outsiders will give self-benefiting advice…

This is normal, and part of human nature.

It is not natural to open an office, which makes money for others. Why?

Because making money for self is always a priority.

What does this mean?

Investment advisors will make money for themselves first, and then for us. Its natural.

Lets take few examples:

  • Brokers: will want you to trade stocks more often.
  • Mutual Funds: will want you to keep doing SIPs.
  • Stocks: will pay dividends and pose as if all is well. 
  • Financial Planners: will first take commission and then give advice. 
  • Experts: will first sell their stock & book profits, and then will appear on media for advice. 
  • Etc.

Such examples will be endless. 

I am not saying that they are all crooks. They are not. 

But what they are doing is, “taking care of themselves first”. 

This is what we must also do. Self first.

How to do it? Start taking investment decision by Self.

Why some people rely on their investment advisors?

In most cases, this is more due to personal relations.

This is one reason why banks generally hire people with following attributes as an investment advisor:

  1. Pleasant personality. 
  2. Good speaking & writing ability. 
  3. Good social skills. 
  4. Well Mannered. 
  5. Yes Men. 

A combination of all the above skills makes a good investment advisor.

In some banks they have even stopped calling them investment advisors. They are now better known as “priority managers”. 

But these priority managers are often seen selling, mutual funds, insurance plans etc.

I hope you must have noted a point, in the above mentioned 5 skills, there is no mention of “investment know-how”. Do you know why?

Because these investment advisors are hired to “sell”. Not to advice. 

So next time, do not confuse between a “pleasant personality” and “knowledge”. 

What you need more is “investment knowledge” from your investment advisor. 

Majority investment advisors are unreliable. 

So what to do? Start relying more on oneself.

Why I am so critical about investment advisors?

Investment advisors must be one of the stronger bedrocks of personal finance industry. Why?

Because they are the one who deal directly with “money of common men”.

Who are common men? People who has no “spare cash“. 

What these people invest are their “monthly savings”.

When money of these people get invested badly due to wrong advice, it is like a crime. 

Why the money was invested badly? Because these people blindly believed their advisors.

So in a way, it is the mistake of the advisor.

The advisor intentionally caused the loss? Not at all. The loss is caused more due to ignorance and lack of know-how. 

If it is so, then why such advisors are required?

This is my point. It is better to do it by self.

Make mistakes, learn and self-improve. No dependency.

This learning is so valuable that, it has potential to transform lives of people for good. 

Mathematics of Advisory Services..

What we have seen till now is, in most cases, the investment advisory services that we get from the market is below standard. 

On top of this, investment advisory services comes at a cost.

A typical mutual fund purchase can “cost us 2%” on our invested money.

Not on returns…

If we hire a dedicated investment advisor, the cost will be similar or higher.

This 2% cost may look like a small value initially, but over time it causes a major dent on our accumulated wealth. How?

Lets take it step by step.

Why we invest money? For wealth creation. 

How wealth is created? By investing small-small amounts whenever we have funds.

The objective is, these small-small amounts all together, should become a substantial amount with time.

How this will happen? Capital appreciation.

So here comes the “effect of compounding of money”.

The higher will be the “returns“, faster will be the compounding.

Now, lets join the dots. 

  • Cost of advisory services: 2% (say).
  • Investment Returns: x% (say).
  • Net Returns: (x-2)%

See, the returns have reduced due to cost of advisory services.

How this effects our rate of compounding? Lets see this with examples.

Take Investment Decisions by self

Case-1: Self Investment

A person made the following investment:

  • Amount: Rs.100,000.
  • Return Earned: 12% p.a.
  • Holding Time: 25 years. 

What will be the future value of Rs.100,000 after 25 years?

Amount (Rs.)ReturnTimeFuture value (Rs.)
1,00,00012% p.a.25 Years17,00,000

Case-2: Investment Through Advisor

A person made the following investment:

  • Amount: Rs.100,000.
  • Cost: 2% on above.
  • Net Invested Amount: Rs.98,000
  • Return Earned: 12% p.a.
  • Holding Time: 25 years. 

What will be the future value of Rs.100,000 after 25 years?

Net Invested
Amount (Rs.)
ReturnTimeFuture value (Rs.)
98,00012% p.a.25 Years16,66,000

In Case-1, Rs.100,000 became Rs.17,00,000.

In Case-2, Rs.100,000 became Rs.16,66,000.

There is a difference of Rs.34,00 between Case 1 & 2. 

Just by investing Rs.2,000 less in the beginning, the person’s wealth got eroded by almost Rs.34,000 (in 25 years).

We make several such investment in our lifetime. Such 2% costs reduces our overall net worth accordingly.

The costlier is the advisory services, bigger will be the loss. 

A more detailed argument…

But some may say here that, going via advisory services may be worth it.

Shelving Rs.34,000 odd rupees for making Rs.16,66,000 is not a bad compromise, right? Yes and No.

Yes, because Rs.16.66 lakhs is very large amount compared to Rs.34K.

No, because making Rs.16.66 lakhs under the umbrella of investment advisor is not enough. Why?

Because there must be some “value addition” of the investment advisor. 

Payment of 2% (cost), should translate into “extra returns“.

What it means?

Even a lay investor can generate a returns of 12% p.a. by self, by buying an index fund 

When an investment advisor takes a commission, they must ensure generation of higher returns (>12% p.a.).

Lets take another example:

Case-3: Investment Through an Efficient Advisor

A person made the following investment:

  • Amount: Rs.100,000.
  • Cost: 2% on above.
  • Net Invested Amount: Rs.98,000
  • Return Earned: 13% p.a (1% above average returns).
  • Holding Time: 25 years. 

What will be the future value of Rs.100,000 after 25 years?

Net Invested 
Amount (Rs.)
ReturnTimeFuture value (Rs.)
98,00013% p.a.25 Years21,00,000

In Case-1, Rs.100,000 became Rs.17,00,000 (@12% p.a.)

In Case-2, Rs.100,000 became Rs.16,66,000 (@12% p.a. minus cost).

In Case-3 Rs.100,000 became Rs.21,00,000 (@13% p.a. minus cost)

What is the point?

The contribution of investment advisor will stand valid only if the they are able to generate those extra returns from his skill. 

In case 3, the investor has made Rs.3,00,000 extra (than Case 1) even after paying for the cost of the investment advisor.

This is good investment advisory service (case-3). 

How to find a good investment adviser?

This is the crux of the matter.

If one can find a “good investment advisor”, it is almost like a blessing. 

But it is not easy to find one in the market. Why? Because there are not enough available. 

As good investment advisors are less, most of them are already busy making money for high net worth people. 

Such investment advisors are not accessible to common men. 

The only alternative available for common men is to opt for equity based mutual funds.

But here also, there is enough “uncertainty”. How?

  • Good funds trade at overvalued levels. 
  • Identifying good funds itself is not easy. 

Among so much uncertainty, I personally feel that spending time to find a solution is not worth.

Instead, one must utilise this time to enhance once own know-how of investment (equity).

Why equity? Because it is only equity which can promise us above average returns. 

I use my stock analysis worksheet to enhance my understanding about stocks.

Conclusion…

What we must learn?

We must learn to enhance our ability to take investment decisions by self.

Frankly speaking there is enough to be learnt here. 

But lets start will the basics first. Other details will begun to fall in place on its own.

Have a happy investing. 

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