13 Things Your Broker Won't Tell You

Axiom One:

Where there is profit, there is always risk. Greater the opportunity of profit, greater the possibility of loss:

There is a close direct relationship between the risk and the reward. Higher the reward, greater the risk. Though this is fairly simple, it is always observed in breach.

Axiom Two:
Gentlemen who prefer BONDS, don’t know what they are missing. On Bonds, there is no return ON our money; there is only return OF our money:
Bonds being Debt instruments unlike equity, yield only fixed return and with inflation and income tax factored in, there is often no return at all.

Axiom Three:

Equity Investment is “risk” investment:
Investing in equity shares of companies is risk related because returns are linked to the company’s profits unlike investing in bank deposits or bonds or debentures where the returns are fixed and accrue to investors regardless of the company’s profits.

Axiom Four:
Stock market behaviour is unpredictable:
Stock market behaviour is dependent on human behaviour and since times immemorial, it has been established that human behaviour can never be predicted with any reasonable accuracy; and hence we have fluctuations in prices of commodities, things and stocks based on greed, emotions, hopes, fantasies, fear and dreams resulting in opportunities of making money out of such fluctuations!

Axiom Five:
Not all common stocks are common:

Though equity shares as an investment class is one, each company has a distinct identity and performs differently and therefore rewards its investors also differently.

Axiom Six:

Investing is nothing but arbitrage of ignorance:

Investing is basically profiting from pricing and difference in market perception of a given product at a given point of time. Stock market is one place where the buyer and the seller both think that they are smart in their decision.

Axiom Seven:
Elephants don’t gallop, zebras do:

Stock prices of big companies with large capitalizations move up or down rather slowly compared to smaller companies because there is not much of market ignorance on big companies to capitalize on. Hence smaller companies tend to reward its investors more handsomely.

Axiom Eight:
Equity investment is not for everyone, nor for all times of a person’s life:

One needs not only “cash” but also “courage” to be an equity investor. There has to be a positive mental temperament and willingness to absorb occasional losses. Those prone to panic at losses should remain invested in fixed deposits with banks and Government Bonds. If you don’t know who you are, stock market is too expensive a place to find it out! Even for a risk loving investor, there is no single static investment strategy valid from his “cradle” to “crematorium”.

Axiom Nine:
Investors make mistake in buying not good stocks at high prices but in buying bad stocks at low prices.

A lay investor tends to buy unsound companies at cheap prices instead of solid companies at high prices.

Axiom Ten:
Equity investment can’t maximize your “income”; but it can maximize your “wealth”.

Actual yield by way of dividends on equity shares with reference to their market value is often as low as 1 percent on our investment. But capital appreciation in equity values can be mind blowingly high. Ask initial investors of Infosys, Pantaloon to name only two companies.

Axiom Eleven:

Saving for investment is not a punishment.

Investing is making conscious choices about how you will use your money. It is not about choosing to live rich or die rich. It is about how you want you and your dear ones should live during your lifetime and thereafter.

Axiom Twelve:
On Stock Prices:

(i) There is no “high” price or “low” price of a stock. There is only the “market” price of the stock nor any price too “high” for you to buy or too “low” for you to sell.

(ii) In isolation, price of a stock is not relevant. What is important is whether a share is “underpriced” or “overpriced”, overvalued or undervalued.

(iii) We do not invest in Stock Market Index; nor in Stock Market; nor in individual companies. We invest in a stock at a price at the correct “time”.

(iv) You can’t control the “market” nor the individual stock prices; but you can control your “reaction” to the market.

(v) Intelligent investing is knowing “what” to buy; smart investing is knowing “when” to buy.

(vi) Your profit is determined by your purchase price and not your sale price. Timing your purchase is important.

(vii) Don’t ask the price of the stock, ask what is the worth of the entire company to know whether the stock is worth investing.

Axiom Thirteen:
On Share Brokers:

(i) Don’t expect your broker to help you to earn “for” you. He is there to earn “from” you.

(ii) The sub-broker made money and the main broker made money and two out of three making money in a single transaction is not a bad bargain.

(iii) Never ask a broker whether you should buy a particular stock, it is like asking a barber if you needed a haircut.

Investor: This was great education!