Have you wondered about the “Chanakya Neeti” of investing in stocks? Listening to the wisdom of gurus of investments is one side of the story. What is more important is that you cull the lessons from them. If you talk of market experts globally then there is Warren Buffett, Peter Lynch, David Einhorn, John Bogle, George Soros and the list can go on. Then there are our own famous investors in India who have some interesting lessons to offer. If we combine these lessons what is the combined investment wisdom that we can put together? Let us look at 7 such consolidated insights that you can gain from the Investment Gurus of the world…
- Plan your investment thoroughly based on your risk capacity
Remember, risk capacity is not to be confused with risk appetite. You may have the risk appetite to bet your bottom dollar but you may not have the risk capacity. Risk appetite is more psychological whereas risk capacity is more practical. It is the risk that you should be taking in your investments. A married man has a different capacity compared to a bachelor whereas a millionaire has a different risk capacity compared to a billionaire. Some may choose to have many accounts while others may choose a demat account opening which is a singular digital platform for holding an account for different purposes. Plan your investment strategy based on your risk-taking capacity; else you are likely to end up on the wrong side of returns.
Before you start investing, evaluate your risk capacity, your return requirement, your tax liabilities and your liquidity preferences. Look at these four quadrants before investing. Start your activity with a plan because if you do not know where you are headed, it really does not matter how fast you run!
- A good investment is one that creates sustainable value
This is the million dollar question. What is that one factor that you focus on when taking an investment decision? Is it growth, sales, ROE, P/E; what is it? The answer is to focus on sustainable value. Don’t worry about what a company is doing today but worry about whether the company can create value in the next 5-10 years. In the world investing it is also called as Moat; which refers to whether the company has created some unique advantage or entry barrier to differentiate from the pack.
- Never make an investment decision without examining opportunities
Any decision has a context and you must always make investment decisions based on the context. For example, if you bought an equity stock that gave 20% returns in the year it is good. But it is not great if the index appreciated by 35% during the same period. Why would you take the risk of equities to earn 15% returns if you can earn that through equity funds? Your choice of investing in ICICI Bank may have been good over the last 5 years but what is the point if all other private banks have given twice that return. Any investment has to be looked at in context.
- Learn by observing; don’t touch the fire to feel the heat
This is a classic learning for investors. You can learn a lot by just observing. When someone makes a mistake in the market, the smart investor learns from it. Experience does not just come from doing but also from observing. You do not need to commit the same mistake and pay the price all over again. If you see people consistently losing their money in small cap penny stocks, they why take that risk at all. In investments; lessons have a steep price tag and is best learnt by observing.
- You either take home profits or you take home a lesson
You don’t always end up making profits but are you at least taking home an important lesson? That is the real question. Nothing is really worthless. Your smallest experiences in the market, your most unrelated learnings may all have a larger lesson for you. There are lessons in investing all around. Just keep your ears and eyes open to absorb them and assimilating them into your investment strategy. Of course, you cannot just keep learning all the time but you do need to ensure that where you don’t make profits, the insights are worth the while.
- Bet on the youth if you want to bet on the future
What could be the big outperformers of the next 10 years? Obviously, a company with a market cap of $100 billion will find it hard to multiply wealth unless you are betting on it to become an Apple or Amazon with a trillion dollar market cap. You therefore focus on young sectors, young companies and young (futuristic) ideas. That is the way mid-caps like Eicher, Motherson Sumi, Britannia and Lupin became large caps and created tremendous wealth in the process. Bet on the young story!
- The only thing common among all successful investors is “Hard Work”
Finally, that is what it all boils down to. The best of investors in the world are extremely diligent and hard working. There is really no alternative. You need to read a lot, collect a lot of information, assimilate and distil the information, then apply your analytical skills and experience, backtest and get back to the drawing board. That is how you become a good investor. Remember, investing is a full-time job and there is no alternative to grinding hard work.
As Euclid would have described it, “Your Excellency; there is no royal route to investing just as there is no royal route to geometry”.