Investing: Hare or tortoise? - Views on News from Equitymaster

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Investing: Hare or tortoise?

Aug 17, 2006

'Buy stock B! It will give you 100% returns in one week!' Buy stock Z, it will rise 50% in 2 days. I am telling you, trust me! Operators will drive it up!These are just examples of how people attempt to 'get rich quick' by trading in stocks. More often than not, such trades are based on rumours and gossip, rather than core business fundamentals. Investors, in their quest for 'quick money', often get trapped in such so-called 'get rich quick' schemes, failing to realise that more often than not, they are actually 'get poor quick' schemes!

As far as we are concerned, we firmly believe in the long-term school of investing. We are of the view that investing in stocks is a long-term process of building wealth, not a casino, where people aim at making their fortunes by taking the maximum possible risks. As a matter of fact, the risk element is a key factor to consider before investing, given the fact that returns can never be de-linked from risk. As a result, an investor must consider the downside first before the upside.

We can compare investing vis-a-vis 'making a fast buck' to the story of the hare and the tortoise. This is a well-known Aesop fable, in which a hare and a tortoise agree to have a race. As expected, the hare races ahead initially, and, when he is almost near the finish line, he gets complacent and decides to rest a bit. However, the tortoise, on the other hand, is slowly but steadily advancing towards the finish line. The hare, blissfully unaware, keeps on sleeping, and in the meantime, the tortoise crosses the finish line, leaving the hare full of despair!

People in the stock markets can be compared to the hare and the tortoise, depending upon their risk appetites, holding period of stocks, patience, resilience and so on. The 'hare' investor is typically an impatient person, looking to make a fast buck, not willing to sit down and study the fundamentals of the companies that they invest in (or rather, trade in), their managements, growth prospects and so on. They are only interested in getting maximum gains in the shortest possible period of time, regardless of the risk involved, and regardless of the company's fundamentals and standing in the industry. Thus, such people would be more than willing to put their hard-earned money into even penny stocks at the risk of losing their entire capital.

On the other hand, people with 'tortoise-like' characteristics are generally more patient, have the ability to withstand downturns in markets and are willing to take time to study the companies whose stocks they invest in. Thus, such people tend to be more meticulous and get more into detail before committing their hard-earned money.

In order to earn money in equities over the long-term and build a decent corpus, it is not necessary to have the IQ of Einstein. Average intelligence will do fine. However, the most important virtue to have, we believe, is that of patience, and the ability to control one's emotions. Investing gurus like Benjamin Graham have said correctly that the number one enemy of an investor is the investor himself/herself. Regardless of whether the market is in a bull phase or a bear phase, an investor must be able to control himself/herself from becoming too bearish or too bullish on stocks. Only if he or she is able to think rationally without allowing the mood of the market to determine his or her thought process, will he or she succeed at investing.

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