If you go to any Indian wedding or office party when the stock market is high, you will hear the same story. Someone will say, India is the next superpower! The market will only go up! Buy this small company share; it will double by Diwali.
It feels good to think positive. But in the world of money, hoping for the best is often a trap. Relying only on hope is the fastest way to lose your savings.
This lesson comes from Admiral Jim Stockdale, a soldier who was a prisoner of war for eight years. When asked who didn’t survive the prison camps, he said: The optimists.
About the author: Ajay Pruthi is a fee-only SEBI-registered investment advisor. He can be contacted via his website plnr.in. Ajay is part of the freefincal list of fee-only advisors and fee-only India.
Here is how this applies to your money, looking at three types of people:
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The Optimist (Vikram)
Vikram is 28 years old. He watches videos that promise fast money. He believes the market is a money-printing machine. He keeps zero cash in the bank because he thinks cash is a waste.
- The Wedding Mistake: Vikram wants to get married in 18 months. He has ₹15 Lakhs. He looks at a Fixed Deposit (FD) giving 6.5% interest and feels cheated. He thinks, If I put this money in the stock market, it will grow to ₹20 Lakhs, and I can have a 5-star wedding.
- The Result: Six months before the wedding, the market crashes. His ₹15 Lakhs becomes ₹13 Lakhs. He has to sell at a loss and take a loan to pay for the venue. He paid a stupidity tax for being too hopeful.
The Pessimist (Suresh)
Suresh is scared of everything. He sees news about wars and inflation and thinks the world is ending. He trusts nothing but gold and bank FDs.
- The Inflation Mistake: While he doesn’t lose money in a crash, he loses money to inflation. The cost of living rises by 7% every year, but his savings only grow by 6%. Over 20 years, he becomes poorer because his money can buy less and less.
The Pragmatist (Priya)
Priya is the Stockdale thinker. She believes India will grow over the next 20 years (Faith), but she knows the market can crash tomorrow (Reality).
- The Smart Move: She also wants to get married in 18 months. She knows the stock market doesn’t care about her wedding date. So, she puts her wedding money in a boring, safe FD.
- The Double Safety: She keeps 6 months of living expenses in a separate Emergency Fund.
- The Result: When the market crashes, she doesn’t panic. Her wedding money is safe. If she loses her job, she has her emergency fund. Because she is safe today, she can keep her other investments growing for the long term.
The Winning Mindset
The most dangerous time for the Optimist is when they are winning. Imagine the market goes up for 3 years straight. Vikram makes a lot of money and laughs at Priya for being too safe.
But taking 100% risk is like driving a car at 200 km/hr. You might reach early, but you are one small mistake away from a fatal crash. Eventually, a crash always happens. Vikram loses everything because he has no safety net. Priya survives because she was prepared.
The Lesson:
Wealth is not created by guessing which stock will double. It is created by the person who can survive a bad year without panicking.
Don’t be the Optimist who expects to get rich quick. Don’t be the Pessimist who is too scared to invest. Be the Pragmatist who prepares for a hard winter, but knows that summer will eventually come. That is how you win.
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Dr M. Pattabiraman (PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over 14 years of experience publishing news analysis, research and financial product development.
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