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Fun versus fundamentals

There's a place for betting on speculative investments, and a place for real investing. Keeping them apart may be the only sensible tactic

Fun versus fundamentals

The word has been out for a while that there is a whole new generation of retail investors who have jumped into the equity markets in the last few months. I have written earlier about SEBI Chief Ajay Tyagi's interview in which he had said that the regulator was looking upon this with some alarm. SEBI's measures to limit risky speculation comes into force on September 1.

This surge in new equity investors might be happening for any number of reasons. It could just be more time with work-from-home and lack of commuting, a heightened sense of the need to invest and make more money, and very likely, more intensive marketing by brokers and other intermediaries. Needless to say, many of the new investors will end up being fresh cannon fodder for the markets. Out of them, a handful, out of luck or some skill, will go on to become more experienced and wiser and will eventually make money in some meaningful quantities.

For someone like me, who always advocates a measured, cautious and conservative approach to investing, it would be easy to fall into the trap of condemning all this activity as something avoidable. However, that would amount to saying that no one should start investing. If beginners do not invest, how will they become experienced investors? Moreover, if they don't do the risky things that attract them to the idea of equity investing, then how will they ever move ahead of that phase?

It is a fact that equity investing attracts people who are, one, incurable optimists, and two, have a certain betting/gambling instinct. I know words like betting and gambling are supposed to be anathema to someone like me but there is no point denying this. If you are not an optimist and not attracted to the idea of taking risks - sometimes big risks - in order to gain something, then you would only be doing fixed deposits in a government bank, as indeed crores of Indians do.

There's little doubt that gambling, whether on cricket or horses or stocks fulfils a deep-set human need. People gamble on everything. Actually, the stock market is the most interesting of these. The same players can be investors one moment and gamblers the next, or even simultaneously. If they like, they can pretend to be one while being the other. They can even pretend to themselves that they are actually careful, thinking investors while they are betting on chance, more or less. Not just that, those who design and operate the markets themselves can participate in this subterfuge. They can launch products and facilities expressly designed to facilitate casino-like behaviour, while paying lip service to the idea of being a conduit of long-term capital for the economy.

The solution to this problem is what I would call 'fun money' - something I had first recommended many years ago. For a certain predefined part of your investments, do not even pretend that you are going to be sensible. This is a sum of money that you invest in stocks where there might be some basis for investing but you know are mostly a gamble. How much of your investments you risk on the fun money is up to you. I think just being aware that some investments are fun money while others are serious would go a long way to solving the underlying problem.

You could start like that and yet eventually realise what works and what does not and that sensible investments actually end up being more fun and the fun money ends being much less fun because of the way returns turn out.

It could be a very useful part of a hands-on investment education that everyone needs.