What you need to invst in equity markets - well, apart from money, time and knowledge ...

Below is the link to one of my old articles - published in Mumbai Samachar

http://www.bombaysamachar.com/frmStoryShow.aspx?sNo=29199

The English translation is as under:

Mental fitness

Last week when the Sensex made a two-year low, I received a sarcastic SMS from a friend: “New SEBI rule from today: If you want to trade in stock markets or the derivatives markets, additional documents must be submitted along with your PAN card and KYC documents. These new documents include cardiograph, your blood pressure readings and fitness certificate from a doctor.”

This conveys the amount of stress that the stock market movements can cause to common men.  Money has a profound impact on our mental state.

I have always wondered: I thought we invest our money to get peace of mind, but one has seen many losing the peace of mind after investing. In fact, there have been cases of suicide linked to losses incurred in the stock and derivatives markets. This is very disturbing. Why should someone get into something that leads to such a tragic end?

Does it mean stock markets are bad? No, not really. It is like railway tracks. There have been many cases of people losing lives while crossing railway tracks instead of using the foot over bridge. Does it mean railway tracks are bad?

In majority of such cases, the mechanism – be it stock markets or railway tracks – are made for certain purpose. If one misuses the system, one should be ready to pay for the consequences.

The other day, one gentleman was talking to his friends about the stock markets and compared the stock market with a casino. Very often, such phrases are used only because there are some misunderstandings prevailing about the stock markets.

So let us understand what exactly is the function of the stock market. As the name suggests, it is a marketplace where buyers and sellers meet and exchange their stocks or money. The stock market’s function is to provide a platform where such transactions happen smoothly and very efficiently, at the same time keeping the transaction costs as low as possible. Once such a platform is available, the stock market is neutral. It does not know or care how one uses this facility. It is available for the transactions.

Whether someone buys it cheap or costly; whether someone sells it cheap or costly – the market is neutral. It does not care at what price the transaction happens since it allows each individual to take a decision to buy or sell at the prevailing price. The transaction price is arrived at jointly by all the participants and is a function of the demand-supply situation. The market does not determine the transaction price.

The demand-supply situation is a function of the information processed by the various buyers and sellers. This is where the responsibility of proper assessment of information lies with the person who transacts.

The stock market provides a platform for the transaction and ensures that the cost of transaction remains low.

One would be better off treating the market only as a market – a place for carrying out the transactions. Why one is selling or buying depends on an individual’s view on the particular security.

We come back to the initial paragraphs. If we understand the function of the market, it means that the responsibility of the decision and its consequences lies only with us. Taking these decisions requires mental toughness since at any time, there will be people who have different views – some optimistic and some pessimistic. The success in investing comes when one can take decisions with a calm state of mind. To get a better perspective, please read the story of “Mr. Market” from the book “Intelligent Investor” by Benjamin Graham.

Hence, I would make a simple change in the SMS we spoke about in the first paragraph: One does not need a cardiograph or blood pressure report; one needs a mental fitness certificate. One needs to develop better abilities to take proper decisions to succeed in the world of investing.

Happy investing!

Amit Trivedi

The author runs Karmayog Knowledge Academy. The views expressed are his personal views. He can be reached at amit@karmayog-knowledge.com.

Amit has authored a book "Riding The Roller Coaster - Lessons from financial market cycles we repeatedly forget. The book is available in two languages - English and Gujarati.