Cricket is often a great metaphor for life. And we like this newest format of the game, T20, because it can teach us a lot about how to manage our investments. Here are 10 things we have learned from the IPL about investing.
1) Start early: T20 does not reward late starters - teams must start putting runs early in their innings. Otherwise, it can get too late and the batsmen are always playing catch up. Similarly, we must also start investing and saving early.
This allows us to benefit from compounding of capital, as well as allows us to "keep the scoreboard ticking" in order to move closer to our goals. Additionally, we have seen how batting sides take advantage of fielding restrictions early in the innings.
Similarly, early in our innings during our youth we must also take advantage of the freedom to do things that we might not be able to later in life. One of these freedoms is to start building our financial resources when we have very few other financial obligations
2) Risk and Reward tradeoff: T20 is all about taking high risks and ensuring that the team gets rewarded for it – whether its aggressive opening batsmen, or field placing or taking risks in trying out new bowlers. Similarly, finance is all about risk and reward.
One must understand that one cannot get very high returns without taking on risk, just like a batsman faces the risk of being caught at the boundary if he is trying to hit a six. We should not be surprised if we get out trying to reach for extraordinarily high returns on our investments because these are of the most risky kind. Also, just like not every ball can be hit for a boundary, not every investment will turn out to be a goldmine. Sometimes singles are equally important
3) Be ready for the unexpected: In case of rain or weather related delays, the Duckworth-Lewis method gets used and can lead to unexpected outcomes that might be highly unfavourable to one of the teams. The only way out is to have already got enough runs on the scoresheet.
Similarly, our investments must also always be ready to deal with unexpected situations that life might throw at us. We must have enough of a margin of safety to be able to protect ourselves against the proverbial rainy days
4) Strategic break: Teams take a strategic break to review their progress and plan for the remaining overs. Similarly, as individuals we too must do the same. Unless we regularly review how well our finances our doing and how we must tackle the challenges that the future will throw our way, we might not end up meeting our targets
5) Balance: Just like a T20 teams needs the right balance of big hitters, anchors and effective bowlers, our investment portfolio also needs the right balance of investments. Too much of growth or aggressive funds, without adequate support or backup, might end up with too much imbalance that can hurt us. We must recognize that our investments should be diversified across sectors and different assets, and not be concentrated in any one area
6) One bad over: One bad over can change the direction of a game and can often make it difficult to recover if a team does not have enough runs on the board (if you are batting) or enough wickets already (if you are bowling). Sometimes in life one also goes through a "bad over" which could take the form of a job loss, or serious injury or illness. If we do not have an adequate safety net then our personal financial situation can be beyond repair
7) Consistency gets rewarded: The Purple cap or Orange cap are given to the best performing bowler or batsman respectively. To win these awards, a player needs to consistently be a good performer. We too must strive to get this Purple or Orange cap when it comes to our personal finances.
What matters most is that we have consistent performance over a long period of time. There is no point in investing in a fund that is really hot in one year, but a poor performer at all other times
8) Coaching helps: Whether its a team coach or a specialist bowling or fielding coach, T20 has shown us that some guidance and direction, especially an objective view from the outside, can help in improving a team’s performance and meetings a team’s goals.
Similarly, our investments can also benefit from some guidance and expertise, especially to get a check on whether we are doing the right things and not making careless mistakes that might hurt us later on in life
9) Distractions can be entertaining but ultimately the score matters: T20 is highly entertaining not only on the pitch but also because of all the music and dancing. But, ultimately a team wins or loses on the back of the score that it has made.
Similarly, in investing distractions like the hottest investments or the flavours of the month will come and go, but what matters the most is that our "investment scorecard" shows a healthy average. We must focus on what matters and ignore the distractions
10) Winning attitude: The IPL has shown that even young players with lesser talent or resources than the great cricketers can do well if they bring the right attitude to the pitch. Similarly, investing is not just about being rich or already having lots of money.
We can start with few resources and little experience but over time make a fortune for ourselves through a positive attitude and willingness to learn from our mistakes. We should not get disheartened if one of our investments has lost money. Just like a young cricketer who believes in himself, we should believe in what we have invested in and stick it out.
If we have put in the right kind of preparation, we will also come out the winner over the long run
Courtesy: Reuters India, May 29