Fail fast, fail cheap

The other day, I wrote a column about the new wave of ‘digital’ IPOs, saying that it’s better for bad businesses to fail quickly than to drag on for decades, sustained in the ICU of investor funds. Later, when I was thinking about the concept, I realised that this ‘fail fast’ formula also has an equivalent in personal investments.

Here's an uncomfortable truth about investment advice: most people don't learn from it. They learn from experience, preferably painful experience. I've spent years writing columns explaining why derivatives trading is a losing proposition, why crypto speculation is madness and why loss-making IPOs are wealth destroyers. The response? People nod politely and then proceed to do exactly what I warned them against.

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This has led me to an unconventional conclusion. Perhaps instead of trying to prevent people from making investment mistakes, we should encourage them to make these mistakes early in life with amounts small enough that the damage is limited but the lesson is memorable. Call it the vaccination theory of investing.

Think about it this way. If a 25-year-old with Rs 50,000 in savings decides to try F&O trading, loses half of it in six months, and then never touches derivatives again for the rest of their investing life, hasn't that been money well spent? That Rs 25,000 might be the best tuition fee they ever paid. The same logic applies to all the other investment temptations that attract young investors. Want to try cryptocurrency trading because your college friend claims to have made a fortune? Go ahead, but limit yourself to Rs 10,000 and prepare to lose it all. Attracted to that shiny new IPO of a company that's never made a profit but promises to revolutionise grocery delivery? Buy a token number of shares and watch what happens.

Suggested read: Others’ mistakes

The key is doing all this quickly and cheaply. Don't spread your education over decades. Don't bet your retirement savings on any of these experiments. Instead, allocate a fixed amount of money that you can afford to lose completely, try all the foolish things that appeal to you, lose most or all of that money and then move on to sensible investing for the rest of your life.

This approach has several advantages over the conventional wisdom of avoiding mistakes altogether. First, it acknowledges human nature. People, especially young people, want to try things for themselves. They don't want to take someone else's word for what works and what doesn't. Second, it provides memorable lessons. A Rs 5,000 loss from a failed cryptocurrency speculation will stick in your mind far more effectively than reading the 10 columns I have written about never touching crypto. Third, it gets the mistakes out of the way early when the stakes are low and the time available to recover is long.

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What makes this approach particularly relevant today is the proliferation of investment options designed to separate young investors from their money. Online brokers make derivatives trading effortless. Crypto exchanges promise life-changing returns. IPOs of unproven companies are flooding the market. Social media influencers peddle stock tips and trading systems. The traditional approach of telling young people to avoid all these things simply doesn't work because the temptations are too numerous and too well-marketed.

Therefore, it’s better to let them try these things in a safe way. The alternative, which we see all too often, is people discovering these investment fads in their forties or fifties with serious money at stake. Of course, the ideal scenario would be for everyone to learn from others' mistakes and avoid them entirely. But since that doesn't seem to work for most people, perhaps the next best option is to fail fast and cheap. Make your mistakes early, make them with limited capital, learn your lessons and then spend the next 30 or 40 years investing sensibly. Your older self will thank your younger self for getting the foolishness out of the way cheaply.

I suppose some lessons can only be learned the hard way. The trick is learning them when the tuition fee is affordable.

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I was wrong

Make your mistakes early