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Investing is all about "Law of the Farm"

    Hello everyone. Shaishab here. For the last few months I have been trying to get some concept of behavioral finance. It is one of the most important and vast portions of the equity market. Lots of concepts came under this behavioral finance like Sunk Cost Fallacy, Psychological Constraints, False Consensus Effect, Myopic Loss Aversion, Confirmation Trap, Peer Pressure Effect, Availability Heuristic and so on. I did not know much about this concept. Just trying to make a note on one of my favorite concepts so that after 10-20 years I can read it and evaluate my present thinking. It is one the biggest portion of the equity market. I did not know 1% of this, so I may be wrong in some portion. The main thing in behavioral finance is that, as Rakesh Jhunjhunwala said in 2012 in a lecture in Flame University “Behavioral Finance can not be taught, it has to be learned.”

    Now comes to one of my favorite concepts of Behavioral Finance. Which is generally known as “Law of the Farm”. All thanks and regards to one of the greatest investors, fund manager and founder of PPFAS Parag Parikh Sir for introducing this concept to me. It is sad to say that he is no longer with us but his books and notes that he has written have guided us to a proper direction.

    As Parag Sir said in one of his lectures in Goa Institute of Management, maybe in 2007 or 2006 that “There are certain universal principles in life which don’t change even if people change, times change, technology changes, geography changes. There is one thing, like the law of the farm. You cannot sow something today and reap tomorrow. Every seed which is sown will have to go through different seasons. It will take time before the seed becomes a fully-grown tree.” This concept is fully applicable in our investing journey. As the farmers do, we can divide our investing process into four different parts.

    1. Preparation of the soil

    2. Sowing the seeds

    3. Adding manure and fertilizers, and irrigation

    4. Harvesting and storage

Now see in details

1. Preparation of the soil

    At first, we should have that proper mindset to invest in the equity. As Sonjoy Bhattachary said “Equity is the easiest way to make money but the hardest way to be in it”. So before entering the market do some Research and try to find how money has been made in that particular market. Every market in this world has a different way of making money. If we look at the Indian perspective, Indian people made lots of money in two wheeler stock. But if we look at other parts of the world then we came to know that there were no markets where people made money in two wheelers. If we are in Saudi Arabia and we are going to invest in an IT service business then we are not going to make money. And if we are in Taiwan and we are going to invest in a large cement company then our result will be a big Zero. So as farmers do, we have to be prepared for this market. Only way to get information about this is to read, read and read. And prepare yourself as the farmers do for their soil.

2. Sowing the seeds

    Now the next part of this universal concept is that sowing the proper and best seed. If a farmer sows the best quality of seeds his result will be much better than the rest. So, the selection of the best seeds is very important. If we see in the Indian market if you invest in companies like HDFC bank, Havells, Titan, Asian paint, Bajaj Finance like company then your result will be far better. Now the next problem we face is that we can not hold it for such a long period. If we see a farmer, when a farmer sows the seeds after he did not pull it to see how the roots are growing. So, in investing we cannot buy and sell it to know how the investment is growing. So, buy it and hold it for a long time.

    If we look at titan from 3-5 rupees it goes to 70. Then it came back to 30 then it went to 300 again came back to 150 then it went to 700 again it back to 450, now price of one share is 2439. So if we sell it at 70 or 300 then we will not see this big amount of money. So be like a farmer sowing the right seeds and hold it for the season to complete its business cycle.

    We can compare this price fluctuation to Marilyn Monroe’s quotes “I'm selfish, impatient and a little insecure. I make mistakes, I am out of control and at times hard to handle. But if you can't handle me at my worst, then you sure as hell don't deserve me at my best.” So when we can not hold our stocks in bad times we did not deserve to hold that in those good times. Similar conditions apply to our daily life. It is also very common to today's generation. When we did not be with someone in his or her worst time then we did deserve to be with that person in his/her good time. Time will pass but it will help us to identify the real one. All of these are unchanged universal principles related to “Law of farm”.

3.  Adding manure and fertilizers, and irrigation

    As the farmers do various steps to protect his crops we should take some action to take care of our investment. As Vijay kedia said “ Invest like a bull, sit like a bear and watch like an Eagle”. Be the eagle for your company. See its report, attain the calls and try to understand the way of management's thought process. Like farmers, add fertilizer and if required take steps for stocks.

4. Harvesting and storage

    Harvesting is important. Basically, it is when to sell. For me when a company completes its business cycle then it's time to sell. If we see in 2013 -14 every two of one Indian has Airtel Sim then its time to exit from Bharti. When the Eicher management said that we are going global it means that the Indian market has become its top for 350cc bikes. Also, at some point I feel uncomfortable when the focus of the management changes, high debt, low holding and so on. For me that is the time for harvesting my crops.

    Now coming to the conclusion, if we think we sowed the seeds today and it will grow tomorrow then we are in the wrong thought process. Like farming, it takes time. In Assam generally rice takes 6 to 8 months to grow. We cannot hope to get it in one months. Investing also takes time. We have to wait for that. If we see Brown Rice (Bao Dhan), it takes more time then the general rice that we cultivate. It takes time so the quality of the rich is far higher than normal one. So in investing it may take time but its seeds will be sweeter then normal one. Like Chinese bamboo three. 1st two years it did not show its result but when it started growing it became the tallest bamboo in the world. So have patience, and have faith in Indians and invest in good company and hold it for ever . Happy Investing.


-Shaishab

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Some good behavioral finance book 

1. The Little Book of Behavioral Investing By James Montier 

2. Misbehaving: The Making of Behavioral Economics by Richard Thaler 

3. ValueInvesting And Behavioral Finance by Parag Parikh 

4. Behavioral Finance: What Everyone Needs to Know by Greg Filbeck, H. Kent Baker, and John R. Nofsingerm

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