Page 57 - DCOM504_SECURITY_ANALYSIS_AND_PORTFOLIO_MANAGEMENT

Security Analysis and Portfolio Management

Notes
excellent but stern Mathematics teacher. But at that point I did not comprehend that it
(interest) was my best weapon against that stealthy enemy (a simple preference for English
over Mathematics?).

Realisation dawns
In High School I was introduced to the dismal science of economics and the world of basic
finance. That is when it all fell in place - the way to safeguard my savings from inflation
was to put it in the bank or invest it somewhere. So that I could earn a rate of interest
higher than inflation and protect my money.
Life rolled on

I entered the workplace at the age of 22. The saving habit came naturally to me. What with
all those sayings ringing in my head - a penny saved...I was determined. I wasn’t going to
let that sneaky character ‘Inflation’ get at my savings. No simple bank deposits for me - I
was going to beat the hell out of inflation by investing my savings profitably in the stock
market. In fact, I would beat the rate of inflation by a wide margin. I was too cool for my
own good. And with impeccable timing, I caught the concluding part of the great Harshad
Mehta orchestrated boom (caught in the Bulls’ tail!). But I caught the full impact of the
downdraught that followed the famous boom. The rest is history.

Some more...
My financial situation or shall I say penury as a result of that debacle taught me some
more lessons that none of my English, Mathematics or Economics textbooks had. A new
host of aphorisms pored forth- No free Lunch, No pain-No gain...You see it is true that you
must save for a rainy day. But what follows, as a natural corollary is that to protect your
savings against inflation you must invest it in some asset that will earn you returns. Be
they shares, debentures, bonds, gold or even real estate.

And therein lies the crux of the issue. All these investment options have been associated
with rags to riches as well as riches to rags stories. So - Investing is a risky business. The
higher the return you expect from your investment, the higher the risk you will have to
take. Your savings are not savings anymore. When you decide to invest your savings you
are crossing the Rubicon threshold. Your savings have now taken the form of Risk Capital.
Risk capital?
Yes, because that is what it is. Don’t panic at the thought. You could put your money in a
government bond or in a NSC and that would qualify as almost a zero risk investment.
(Actually it is just the lowest risk investment available to you, but that’s the topic of
another debate). And at the other end of the spectrum you have equities, which come with
a high degree of risk. So do Gold and real estate. But we’ll discuss that some other time.
It’s time to step back and spell out what I have learnt
1. Savings is the difference between Income and Expenditure

2. You must save for a rainy day
3. Savings have no ‘form’ and must be protected from Inflation
4. When you invest your savings it has morphed into Risk Capital

5. Risk Capital can be eroded
6. Risk can be minimized by choosing to invest in low risk investments
Contd...

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