Make your mistakes early

Recently, I've caught a certain amount of flak for saying that this bear market is a welcome one. One of the reasons I gave, in this newspaper and on Value Research Online, was that investors learn an invaluable lesson in bear markets. People don't like this kind of statement, obviously. However, it's absolutely true. After a quarter-century of interacting with investors, I have come to believe that for the vast majority of those who try to make money from directly trading or investing in equities, there is no substitute for personally learning from hard and bitter experiences. Note that I put myself in this category too. I travelled this road personally and became a better investor and investment analyst because of it.

No matter how much theory you learn, it's just theory. Unless you make some bad decisions and then suffer because of that, you do not get a feel for what investing is all about. In this sense, all of us who are investors are like children. There's no substitute for children playing by themselves and getting hurt and learning what to do and - more importantly - what not to do. The excessive parental obsession with safety from serious harm nowadays means that children grow up without having faced any adverse situation. As a result, many of them hit adversity quite late in life and are less ready to cope with it.

This happens in investing too. In the investing context, what that means is that volatility and losses are necessary to become a really seasoned and successful investor. However, just as with children, it's clearly better to have this learning experience early in your investing life. When I say 'learning experience' I obviously mean losing money. It happens to everyone. You invest in something, completely convinced that it's a great choice and will bring huge profits. Then the markets hit a slippery patch like the last few months and the investments sink and keep on sinking.

Gradually you realise that you made a sub-optimal choice. You probably did not have an idea about how investments should actually be chosen. As a result of this, many investors become more self-aware and quickly learn what not to do. Getting this experience early is important. When one has just started investing, then for a few years one does not have overly large sums of money in stocks. Generally, it's perhaps a few months' worth of income. Losing a few thousand rupees may feel like a big impact at that moment but it's not a serious financial impediment. It's a relatively small price to pay for getting a first-hand experience of the ups and downs of investing.

Just as useful is the situation in which people realise that it's not that they made a wrong investment but that equity-based investments take time to go through market cycles and prove themselves. An investment that looks like a bad choice in a bear market soon proves itself to have been a good one. If you had sold it off during the slow time, then that's a great experience gained.

At the end of the day, it is of great value to start investing in equities or equity-based mutual funds early in your earning and savings life, at least in modest amounts. The sooner you start, the quicker you will go through the kind of experience that investors are having today and the earlier you will become a seasoned investor who can handle such phases.

I must point out a most important thing - this is not education about investments or the markets per se. Instead, it's actually a maturing of one's mental attitude to investing. You learn nothing that you could not have learned from books and videos - instead you learned to take adversity in your stride. That's what experience means.

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