The other day I heard someone say that the investment community in India was being 'over-literate' in its reaction to the US credit markets crisis. It's an interesting idea, this over-literacy. What it means is that people are being over-knowledgeable about the crisis and are thus over-reacting to it. Over the last few months, it has looked like that events around the world affect the short-term sentiment on the Indian stock markets far more than they affect other markets. Since I've always believed that being knowledgeable is a basic requisite for being a good investors, I was surprised to find myself agreeing with this idea of over-literacy. However, in my opinion, over-literacy is really a problem at an individual level-professional investors and analysts should be as literate and knowledgeable as possible.
At the individual level, things are different. Many, perhaps most investors really do pay more attention to the big-picture side of investing than to the micro side. In this sense, the big-picture side is what is happening to world and the Indian economy and the micro side is what is happening to your personal finances. There is this childhood friend of mine who is a perfect example of this problem, and since he is a childhood friend, I feel at complete liberty to criticise him. Last week, he wanted to know if he should rethink which ELSS fund he should make his tax-saving investments based on the farm loan waiver or the US credit crisis. I got really angry with him when I heard this. Here's a guy who pays out about 70 per cent of his salary on EMIs of various things he can do without, including an unneeded second apartment which is declining in value, a second car that's far too fancy and various sundries like LCD TVs and video cameras, all of which are mere replacements for older models that work perfectly well. He saves nothing more than the Rs 1 lakh 80C limit and his PF.
As I told him with a great deal of frankness, his savings goals would be far more achievable if he focussed on simply saving more money rather than being worried about stuff that P Chidambaram and Ben Bernanke can manage by themselves. A very big determinant in how much money your savings and investments will make is to have more savings to begin with. This sounds like a laughably simple idea but it isn't. It's the one thing that is under you control. It makes very little sense to read too many newspapers and watch too much business TV and keep obsessing about those things rather than figure out how to save more. It's a little bit like going to great lengths to choose a vehicle that has five per cent better fuel consumption when it's so much simpler to just reduce your driving by five per cent.
Does that mean that big picture doesn't matter? It does, but it's pointless to worry about that before you fix the small stuff. Look at it this way. If you manage to start driving five per cent less, than it will be far better to also have a car that consumes five per cent less fuel.