The power of skepticism and calculation

Jan 18 2010, 22:36 IST
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SummaryAs kids, we were always taught that there is no substitute for hard work. While growing up, we were taught to work hard at our studies, as well as our extracurricular activities.

As kids, we were always taught that there is no substitute for hard work. While growing up, we were taught to work hard at our studies, as well as our extracurricular activities. And we did, at least the most of us did. But as we got older, hard work went to the backseat at some level. Don’t get me wrong, we still work hard at our jobs, we still work hard to ensure a healthy and happy life, but there is no doubt that a lot of things have become easier than they were. Technology has particularly made a lot of our tasks easier. Information is just a couple of ‘googles’ away, communication is easier with cell phones and emails, and the like. In fact, even investing has become easier. But, as far as I’m concerned, this is one area where the good old hard work can never be replaced.

These days, investors are being offered ready-made investment solutions. Just like we buy ready-made clothes, buying these solutions is easy. You pick the one that suits you the best. But, without a certain amount of knowledge, an investor wouldn’t even be able to choose the solution that’s most ideal for him. This is where learning about investments the hard way comes in. To pick the most apt investments, you need to put in some time and effort behind understanding at least the basics.

Before you get anxious, let me tell you that I’m not talking about sending you back to school. In fact, the basics that you need to learn and apply while investing are just two simple elements – skepticism and arithmetic. These basic elements make for an unusual pair but are interlinked when it comes to investments. Skepticism will make you want to calculate and compare investments before you narrow done on one. And arithmetic will help you carry out these calculations and comparisons.

Let me elaborate with an example. Let’s say you get a call from a fund distributor you know. He tells you to buy this great fund that has generated stupendous returns in the past six months. Without skepticism, you would go ahead and buy the fund. But if you’re even the slightest bit skeptic, you would probe deeper and find out how the fund has performed over various time periods like one-year, three-years, five-years and through bear phases and bull runs. These calculations would

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