In investing and entrepreneurship, it's impossible to never have a shock - the trick is to ensure that this does not happen regularly
19-Apr-2022 •Dhirendra Kumar
One day, you decided to start investing in equities. You taught yourself how to choose stocks. You read books, watched videos, talked to experienced investors, subscribed to many investment magazines, etc., etc. When you felt that you had learned enough, you started choosing stocks. Since you had learned to invest properly, almost all your choices were good. You kept making money steadily and eventually became very rich.
This is how it happened, right? Surely, that's how it happens to everyone who takes care to learn how to invest. And since there are so many resources available on how to invest, it's clearly easy to learn. It's smooth and easy.
At least that's the impression you get when you see other investors who have been successful over many years. That's also the impression you get when you read about many investors' exploits on social media where everyone always makes big profits, but that's a different story.
Businesses are like that too. It's easy to form the impression that a huge and strong business would never have had any serious problems. That's hardly true. In any kind of risk-based activity, there are always huge shocks, especially early on.
The other day I came across the story of how Walmart - the world's largest retailer - almost didn't survive the first business shock that its founder faced just five years after he got into the business. Sam Walton, the founder of Walmart, started a franchisee of a chain of stores named Ben Franklin in a small town in 1945. It was a small sleepy town and wasn't supposed to be a great prospect. Moreover, Walton was completely inexperienced and there was no reason to expect him to make his store a success. And yet in five years, he became a wildly successful businessman, taking the store's annual sales from $70,000 to $250,000.
And then his lease on the property expired. He then realised that the lease he had signed upon taking over the store had no renewal clause. The landlord decided that he would rather push Walton out and run a store on the location himself. He gave Walton two options - either close down the store and face bankruptcy or sell it to him for a modest price. Walton had no recourse. He had to sell the business, go to yet another small town and start afresh. Walton later said that this shock was the low point of his business life. The interesting thing is that he clearly saw where the blame lay - he should have paid as much attention to the legalities as he did to what excited him - running the business.
Is there a parallel here to what all of us are doing all the time as equity investors? You bet there is. Choosing new stocks and investing in them is what's exciting. Diversification, asset allocation, portfolio rebalancing, monitoring old investments - all this is boring stuff that is even duller than reading leases must have been for Sam Walton. And yet that's where money is preserved and grown - which is just as important as getting returns in the first place. Over the last couple of years, because of COVID and then these 'digital' IPOs, a large new batch of young investors have been having a torrid time in the equity markets.
In a way, a phase like this is a necessary part of the education for new investors. When markets are shaky, and money is not flowing in, then the good, the bad and the ugly get differentiated. It matters not one bit what one expects or what the gurus are predicting or what's happening in the world. That matters only to the headline writers.
Every successful investor and business person goes through such shocks. The thing to understand is that so does every unsuccessful investor, the ones who never make money and give up. The important thing is to ensure that we do the boring things regularly and correctly - that's what saves us.