We have seen seismic shifts in India caused by the pandemic’s fog of uncertainty. One of the most surprising ones being - surge in Demat accounts in India.  2020 was the year when everyone suddenly seemed to be interested in INVESTING, specifically stock investing. However, rather than following the bandwagon, one needs to check if this world really suits them. Legendary investor PETER LYNCH has given us a tool of 3 simple questions, it's called the - "MIRROR Test" and if you pass it, then welcome to this world of Stocks. So without further delay, let's delve into understanding what is this Test all about?

He recommends look into the mirror and ask yourself these 3 questions:

1. Do I own a House?

2. Do I need the Money?

3. Do I have the personal qualities, that will bring me success in stocks?

HOUSE Factor :

Peter Lynch says one should own a house, before investing in any stocks. They say a house is a money maker - 99 out of 100 times. Either by renting your house, you start getting a monthly rent or by staying in your own house you start saving on the rent, that you need not pay now. A house also sees value appreciation over years increasing your net worth. Peter Lynch observes that people spend months, sometimes years before investing in a house, however, when it comes to stocks, people are ready to buy even before doing any research. Capital preservation continues to be one of the most underrated factors in anyone's success.

I also see in the backdrop of this pandemic, people have realized the importance of owning a house. When someone loses a job in a pandemic, if they have a house, for which they don't have to pay the rent - that's an advantage that cannot be quantified. Compare that to a person, who is forced to return to his hometown, simply because they cannot afford to pay his rent anymore, and thus losing out on all opportunities that the city had to offer. No wonder we saw an insane number of sales during the September 2020 - March 2021 period in India. In fact, I have seen a few millennials, who lived happily just backpacking are now considering owning a house.

MONEY Factor:

The second part of the Mirror Test is to ask yourself "Do I need the money?". He recommends if you are planning to use that money in a year or two for any planned expense ( say wedding, higher education, etc.), then you are better off NOT investing that money into stocks. He observes sometimes people fall prey to the notion of investing in blue-chip stocks ( stocks of Large Corporations), thinking their money is safe. But history has shown repeatedly that even they can underperform for 3-5 years and you shouldn't be caught on the wrong side of the cycle. His suggestion "Invest ONLY that money, that you could afford to lose, without that loss having any effect on your daily life in a foreseeable future". Someone has rightly said - Ambition needs to be tempered with reality.

Don't put all your eggs in one basket, is a maxim that still holds true. And especially when that money is something earmarked for some important event in your life, it's better to be safe than sorry. Stay away from Stocks.

Personal Qualities Factor :

Considering you have cleared the first two questions, you arrive at the most important question of the Test - " Do I have the personal qualities, that will bring me success in stocks? " If you thought Finance & Mathematics was all you needed to crack the world of stocks, then sorry to disappoint you that's not how it works. According to Peter Lynch, the personal qualities that are most important to be successful in the world of stocks are 'patience, self - reliance, common sense, open-mindedness, detachment, persistence, humility, willingness to do independent research, equal willingness to admit to mistakes and the ability to ignore general panic. He reminds us that it's important to resist your human nature & your gut feeling by focussing on the company & not on the stocks. Ask yourself do you have these qualities? If YES, great. Else, just prefer the safe route of investing through Mutual Funds.

I was listening to Rajeev Thakkar the star Portfolio Manager of PPFAS Mutual Fund, a couple of months ago and in his true nonchalant style, he reminded everyone on the Webinar the golden words of Parag Parikh - "EQUANIMITY, not genius leads to riches". Don't get excited by your wins nor feel depressed with your losses, stay calm & invest in good companies. Remember that volatility is the innate nature of the stock markets and one should not aspire to time the markets, instead focus on the time they are there in the markets.

I personally know a couple of people who sold their entire Portfolio in the third week of March 2020 - as markets had tanked around 40-50% by then, in a short span of time. Today they have the regret of their life, as India saw one of the best bull markets ever from the 4th week of March 2020. I keep reminding myself of the classic Marilyn Monroe quote, as if the Markets is constantly telling me this: " If you can't handle me at my worst, you sure as hell don't deserve me at my best".

Happy Investing!

#MadAboutStocks