Equity Investing, as I understand it!

For a large number of equity investors, equity investing is about what they do in the stock market – buying and selling based on ticker prices. That is where it starts, that is where it ends.

The only thing that matters to them are news items such as:

• Stock market up by 200 points
• Markets down by 100 points
• Nifty up 3 days in a row
• Sensex posts biggest fall in 6 months

and on and on and on.

The onslaught by the media adds fuel to the fire. The best picks of the day are discussed, worst picks are beaten down, target price, stock market predictions, everything that occupies your current time and attention, all leading to nothing.

How is this information helpful? I might be sounding ignorant here, but seriously, help me understand.

Constantly working with only the stock market prices and nothing else has brought us to a situation where we know the price of all stocks but the value of none.

Is this how equity investing really done?

I would say NO.

Entire generation has been corrupted and scared due to this ticker approach to equity investing.

I would even shudder to call it investing. It’s a kind of a mental sickness. A similar one to wanting to see your phone every few seconds, to check if there is a message or email. You keep looking at the prices once in an hour or  a few times a day.

Thankfully, I have been spared.

I don’t look at stock markets on a daily or weekly or even monthly basis. I have got nothing to do as such with the markets.

Even when my clients call me to ask why the markets are going down, I am like “Okay. Thanks for letting me know. But I have no clue.”

What’s the contribution of the stock exchange or stock market to equity investing?

Exchange stands for give and take. Stock exchange or stock markets are about give and take or buying and selling of stocks.

It is a place where you can easily participate in businesses and buy ownership in companies of all shapes and sizes. As you would understand, ownership brings with it risk as well as reward. As an owner, you get to participate in the profits and losses of these businesses, without any guarantees.

What if there was no stock market? How would we invest?

The alternative to investing through stock markets

So, in case of businesses which are listed on the exchanges or stock markets, finding information about them is easy since a lot of information is shared publicly. Not just that owning the shares of these businesses is equally convenient – just a click of a button.

If there were no stock markets, you would have no tickers and information in the public domain would be limited.

The alternative would be to invest in private businesses. So, you would then invest in a friend’s business or a friend’s friend’s business – assuming that you would be interested in the rewards that ownership brings.

Also, making deals in those businesses would not be as easy.

First, you will have to put in significant effort to find out relevant information based on which you will make the investing decision.

Then, you have to determine the value of the business and negotiate the price that you would like to pay to take a stake in this business. The ROI has to make sense.

Finally, buying and selling ownership in these private businesses may not be easy, procedure wise.

As you can see, the stock exchanges only make this process easier.

How would I do equity investing?

As a good investor, I will invest money in solid businesses that demonstrate growth, strong and growing cash flows, which reward investors with increased business value or dividends. All this delivered by a competent and committed team.

I would not even shy from new ideas as along as I can see the opportunity and the potential.

When business does well, profits grow, cash flows grow and eventually, this is what gets reflected in stock prices as well.

As an investor, I would go about picking a few such businesses that I can understand and rely on to grow my wealth and enjoy ownership.

On a periodic basis, I would review these investments. If they continue to make sense, I remain invested. Else, I would sell my stake and exit.

Yes, there can be times when businesses don’t do well and that could be for several reasons. If the business has not become fundamentally weak, there is no reason to exit or sell.

That’s what equity investing is actually about.

Not the mad buying and selling based on the tickers that keep moving the TV or computer screen. What is shown on the screens is the market’s current perception about that business.

The market price is only a number that is on offer. You don’t have to act on it. The market’s understanding of the business and the price may be absolutely wrong. You should use your own analysis and judgement.

Next, you sell only when you think that business does not have any potential left, OR, there are better opportunities that you can put your money to work in, OR, you need the money for other needs that you have.

Does that sound too much work to you? Well, then you are not yet ready to be a direct stock investor.

But there is a solution that exists for you. You can outsource this entire activity to a professional team who will do it on your behalf.

This solution is called a mutual fund. You can invest your money in a mutual fund and it will do the investment job as described above for a fee for you.

You choose – equity investing via direct stocks or outsource it to mutual funds.

So, tell me, what’s equity investing for you?

Read more: Equity Investing – Let’s get this straight. The story of 2minutes Noodles.