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For fun and profit

Equity investors have two sides to their investing psychology and to make money, it might be best to exploit both

For fun and profit

A few weeks ago, I had written about how easy mass adoption of the riskiest kind of trading behaviours is setting up a new generation for catastrophic losses. Even though human behaviour is the same, new kinds of trading platforms are making it easier and easier to do the kind of things that have a high probability of losing a game-quitting amount of money.

In connection with investing, the first thing many young people hear about is how easy it is to install an app and start trading and make some money on the side. And the important thing is that it's true under certain circumstances in the equity markets. The cycle of the bull and bear markets you would be familiar with, but this is overlaid on another cycle - that of new investors coming in, experiencing the whole thing and learning something. This would be fine except that the markets attract new investors in the largest numbers in the time when it's the worst time to do so. From the data available about the Indian markets, it seems that for the last year or so, this seems to be happening at an exceptionally high rate now.

There could be many reasons for this. It could just be more on the hands of the keyboard workers who did not have to physically go to the office or some kind of a financial push born from a fear of uncertain times. Along with that is the sheer ease of doing it now. Digitally accessible bank accounts, trading apps and much more intensive marketing by brokers and other intermediaries doubtless play a strong role. Two decades ago, the instincts may have been the same but the sheer friction of the pre-digital financial system made this impossible for all but the most persistent and the well-heeled. And it's not just young and fresh investors. Many older generation investors have also been lured back in by the same factors. Of all these, only a handful, whether out of luck or some skill, will go on to become more experienced and wiser and will eventually make money. The rest will fall by the wayside of the equity markets.

So, if you are attracted to the idea of trying your hand at equity trading, what should you do? Am I saying that everyone should eschew all risk and just invest in conservative mutual funds? Knowing investors, one should realise that that's not going to happen. One should recognise the fact that equity investing attracts people who are not only deep optimists but also have a certain betting or gambling instinct. There is no point denying this. If you are not an optimist and not attracted to the idea of taking risks, then you would have stuck to fixed deposits in a sarkari bank and would probably not be even reading this because you would then not be a reader of this publication at all.

The solution is simple - what I call 'fun money'. Understand that there is money for investing and there is money for punting. Decide on the fun-punting amount, recognise that you might lose it and for that amount, do not even pretend to be an investor. This fun money should be ring-fenced from your real investments. Do not fall into the temptation of extending the fund money allocation - ring-fence it mentally. From now on, there is a sum of money that you put in stocks where there is some basis for a gain but you know that it could well be a gamble. The exact numbers obviously depend on your general finances but all you need is being aware that some investments are fun money, while others are serious. This is all that is needed. Most people do not even understand that this division exists, but accepting and understanding it could key to becoming a successful investor.

The limits of fun
However, it would be much more fun if fun ≠ losses. If you buy every 'SMS stock' or 'WhatsApp stock' that someone is pushing right now, then the fun will turn to sorrow pretty soon. The thing to understand is that you can buy stocks with no long-term commitment and with an eye only for quick profits and still keep quality in mind. In fact, the only way to have sustainable fun is to keep quality in mind.

At Value Research Stock Advisor, our main focus has always been to recommend stocks that are for the long run. However, some months ago, we also created a subset of these stocks called 'Best Buy Now', which are, as the name indicates, also suitable for inserting an element of fun (in the above sense) into your investing plan.

Currently, we have 43 stocks on our main recommendations list and 15 of them are in the 'Best Buys Now' selection. Click here to learn more about Value Research Stock Advisor and see if you would like to become a member.