Law of Average & Diversified Consistent Investment

We all might be facing some kind of issues / problem in day today life. This might be either in business, professional, financial or personal life. If there is no issues or problem to someone in this world (Except kids), it is a great day for them and i wish them to have more similar days in future. Also, one should not stop taking calculated risks to avoid issues or problems. When we face these issues, sometime we might take wrong decisions. To avoid this, it is always better to consider the law of average before taking any decision.

Law of averages is nothing but considering the previous facts and current situations and deriving to a mid point. When analyzed this mid point, the decision making will be easy and simple. To understand this better, let us consider the below incident. There was a transport company owner who owned around 10 trucks and delivers apples everyday to the other part of the country. On the way, there were many bridges and mountains to pass by. The owner was always in a worry that, what if the bridge broke down or the trucks broke down in the middle of the mountains. If so, he could not deliver apples on time.

These worries gave him sleepless nights almost everyday. Once there was a discussion and the transport company owner was asked, How many years was he running this business?. He said, he was running it for around 25 years. Well. Now, the question is the how many round trips the trucks have made in these 25 years?. He said, it was around 1,00,000 times. Now, how many times the trucks broke down in middle of the mountains?. He replied, it was hardly 5 time a year. He also added that he maintains the trucks well. Now, the next question asked was, how many times the bridges on the road broke down?. He replied, Not even once.

By hearing this, it was understood the trucks made a trip of around 4000 times a year and the break down was recorded 5 times. This is very negligible. Also the next worry was not even a single time the bridges were broken. So, the law of average here is one in 800 trips the trucks have faced the break down and there is nothing to be worried on this. Even if that happens, the transport owner had the necessary insurance to overcome the situation. So, before taking any decision, it is mandatory or better to arrive at the average point by considering the facts. This will eliminate all worries and give us a clear mind to take decisions.

Diversified Consistent Investment

In financial world, it is very important to diversify our investment. As Warren Buffet said, don't put all your eggs in a single basket. It is always better to have more than 1 form of investment segments or invest in more than 1 equities. There can also be an argument that it is also better to concentrate on a single business and take care of it. Yes, it is good to consider the ONE THING but being an investor, we might not have the control on the particular business until we are one the board of directors.

Being an investor of stock market or mutual fund gives the flexibility to own multiple quality businesses. This way, the law of Average will work better. The key point is we need to invest consistently in all segments. When we have money, it is not wise to put all the money in one go on a particular company. Even though the company gives better rate to enter, it is always wise to invest consistently day by day. I have even noticed, when a person buys everyday a small quantity of business, he gets emotionally highly satisfied and he continues the habit.

When bought everyday, the price of the business purchased will average and the profit will grow steadily with the quantity of the stock. This we need to do with all the stocks in the portfolio. This will give great returns in long term. It is always wise to average our portfolio by diversifying and consistently investing.

Have a Great Day

B G Nareshkumar