Investing Only in What I Understand

A note from the author: This is the second article in a series where I aim to share my personal financial journey and the decision-making framework I use. I am not a financial advisor, and these are reflections on my own choices, values, and rationale, not recommendations for others. I hope that by sharing my thought process, I might offer a different viewpoint or spark useful reflection and discussion for those navigating similar paths. I welcome alternative, including contradictory, perspectives. If you find any factual errors in this article, I would appreciate it if you could point them out.

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In the first article of this series, I shared the broad philosophy that guides our family’s finances—our focus on balancing future goals with our present well-being. That piece was about the ‘why’.

Now, we move from the overall philosophy to the specific principles that guide my investment decisions. This article covers the first and most important filter I apply to any potential investment: my conviction to invest only in things that I genuinely understand. If you missed the first article, I suggest reading it to get the full context for my approach before diving into this one.

Link to the first article: “What I’m Saving For (And What I’m Not): My Plan for Our Family’s Finances”

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The financial world often bombards us with opportunities – from the multi-level marketing (MLM) schemes that were prominent around 2012, to the meteoric rise of cryptocurrencies like Bitcoin in recent years, or even hearing a friend in equity investing discuss generating 30-40% compound annual growth rates (CAGR). Amidst this, a core principle guides my decisions: I invest only in things that I genuinely understand.

What “Understanding” Means to Me

For me, “understanding” boils down to a simple question: if I put ₹100 into this, how does it realistically turn into ₹110? I need to grasp the fundamental mechanism by which it generates money. My core belief here is that sustainable financial returns come from adding genuine value. If an entity or an asset is creating real value that others are willing to pay for, then it makes sense that it can generate wealth.

This is why I stayed away from MLM schemes, even when many people appeared to be profiting. When I tried to understand their fundamentals, I couldn’t see the value creation; it seemed to merely circulate money from newer members to earlier ones. That didn’t make sense to me as a sustainable model. Similarly, with assets like Bitcoin, while I acknowledge its performance, I personally haven’t been able to grasp how it fundamentally generates new wealth or intrinsic value in a way that I can confidently explain.

This isn’t to say that what doesn’t make sense to me is automatically nonsense. It simply means that if I cannot personally make sense of the value-generation process, I choose not to invest my capital in it.

The “Why” Behind This Principle: Avoiding Speculation

If I were to invest in something that doesn’t fundamentally make sense to me, on what basis would I be investing? The only basis would be, “Well, it’s generating returns for others, so it might generate returns for me too.” For me, that crosses into the realm of speculation, not investing. It’s like hoping a trend continues without understanding why it started or what sustains it. To have any conviction about whether an investment might make money in the future, I first need to get a sense of how it’s making money now.

My Process for Understanding a Potential Investment

When I encounter a new investment opportunity, my typical process is to seek this fundamental understanding. I’m not necessarily aiming to become an expert or get lost in deep nuances initially. Instead, I look for two key things:

1. The Values of the People or Entity Behind It: I try to see if there’s evidence supporting core values that resonate with sound investment principles. For example (and I plan to discuss this specific investment in a later article), when I considered investing with Parag Parikh Financial Advisory Services, I found considerable evidence supporting their stated values of long-term investment, transparency, and patience.
2. Demonstrated Capability: Alongside values, I look for evidence of capability. In the same example, their past track record showed consistent, good returns over a significant period (around 10 years at the time I looked), suggesting competence in their approach.

If I can get a sense of both positive underlying values and demonstrated capability, and if their method of generating returns by adding value makes sense to me, then it’s something I might consider further.

“Genuine Value” vs. Speculation

When I speak of “genuine value,” I mean activities that are truly productive or add service. For instance, when I looked at how a fund like Parag Parikh operates, I could understand the value being added: a team of people conducts thorough analysis of companies, aims to identify potential long-term winners, and then invests in those businesses. They are investing their expertise in understanding businesses to generate, ideally, predictable and sustainable returns. This is about long-term business growth, not short-term market speculation. That model of value creation makes sense to me.

The Emotional Trade-Off: Peace Over Chasing Every Opportunity

Adhering to this principle means I will undoubtedly miss out on potential winners, such as what Bitcoin has appeared to be for some. I’ve made my peace with that. These are conscious choices – “calls that I’ve taken,” as I see them. The reality is, I am not willing to invest the enormous amount of time it would take to thoroughly understand every new financial instrument or trend that emerges.

Because I accept this as a direct repercussion of my choices, I don’t feel anxiety about missed opportunities. If I constantly felt anxious, I’d have to question my approach. But for me, a life spent constantly chasing and dissecting every financial nuance is not how I want to live. My peace of mind is a higher priority.

My Stance

Ultimately, investing only in what I understand is an approach that aligns with my desire for clarity and conviction in my financial decisions. It helps me filter out the noise and focus on what feels rational and sustainable for me. Again, I’m not claiming it’s morally or financially wrong for others to speculate or invest in things they may not fully grasp. I’m simply stating that it’s not my approach.

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What’s Coming Next

The principle of only investing in what I can genuinely understand serves as my primary filter, helping me avoid speculation and invest with clarity.

But what about an asset class that is widely understood? Sometimes, even if an investment makes sense on the surface, other factors can make it unsuitable for one’s specific temperament and goals.

In the next article, I’ll share my practical and financial reasons for “Why I Have Stayed Away from Real Estate as an Investment”.

Following that, we’ll move from an asset I avoid to one I embrace, as I detail “My Journey in Equity Investing” and how I found an approach that aligns with my values.

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