Welcome back! Gracias amigos for your sustained faith in us and we’re delighted to present the sequel to our yester week’s newsletter. “Learn from other’s mistakes, we can’t live long enough to make them all ourselves.” - Chanakya Pertinently, learning from our mistakes and a thorough scan of the mistakes of others, we’ve drafted these five mindset or behavioral commandments.
6. Prepare not predict Would gold make a new rally next year? Is SENSEX already past its peak? .......and umpteen such questions are encountered by investors every day. An average understanding of market tells us that investments of any kind are extremely volatile, especially in today’s VUCA world. We can’t predict how an investment will behave in the future. Perhaps, it’s consequent to this fact that the investments today are notorious for their propensity to defy logic or rationality! Now, the logical question that must be answered is… "If we can't predict, how do we make choices?" PREPARE! Just like you did for your board exams, or for your entrance exams, well maybe not so studiously, but yes, judiciously! Benjamin Graham said in "The Intelligent Investor" and we quote “The individual investor should act consistently as an investor and not as a speculator.” The essence of the statement being that we should act as investors and not as someone who can predict the future. Your returns are a function of analytical spadework and not crystal gazing! Let us take the example of both: An investor and a speculator (predictor)!
7. Be Goal Driven We’ve discussed adequately the importance of analysis but it starts with one question… What is your goal? Imagine playing football without a goal post… Or jogging without deciding when to stop… Sounds delusional, right? It would be common sense to decide what you want to achieve, by when and what your risk appetite is. These factors knit into your choice of stock would give you a clear goal… An unambiguous and pragmatic goal. We understand that it can get tricky at times to answer these simple queries and apropos we’ve listed four simple steps for you to chalk out your goal: Step I
Determine your return expectations along with the duration…
Say for instance, 100% return on investment in 5 years (Happy!) Now, we’ve decided where we want to reach and by when but how do we plan to reach there? Assume that we have to physically complete this journey and there are various vehicles that we need to choose from… Now, these vehicles are different in their speed, safety, maintenance, endurance and risk. We would then choose our vehicle based on step I. The stocks, bonds, equities and other investment options are called Investment vehicles. Step II
Select an investment vehicle compatible to your requirements from Step I.
Note: Step I and II can be interchanged based on your risk appetite. Remember personal risk assessment from our first newsletter? In that case, you first determine what instrument suits your and set feasible returns and duration accordingly. Let’s say, the InvestorSchool is a safe bet for you with bright growth prospects and you choose to invest 100 units in this investment vehicle. You would then analyze the expected growth rate and set your goal accordingly. Maybe, 140 in one year. Step III
Invest in the chosen asset and check your portfolio regularly.
It would be pertinent to mention that frequently and regularly are two different patterns and are not mutually replaceable. Now that you’ve invested in the InvestorSchool, regularly would mean coming back every week for our newsletters to make sure your investment is growing. This is a periodic check to negate/ minimize the damage due to uncertainty in investment realm. Step IV
Once you liquidate your investment once you’ve achieved your target or invoked your exit strategy; exit and do not check back.
Seems simple enough? In our opinion, this requires the soldier degree of discipline that top investors possess and is lacking in an above average investor. Why though? If you realize that you’ve exit prematurely, you would trigger guilt and self-doubt. If you were able to exit just before the prices reversed you will be triggered with ego and pride. Both the scenarios will hinder your judgement in the future. Our two cents: Once you start an investment, it’s very difficult to predict, either the return or the time frame for the targeted returns. Make realistic goals in conjunction with return targets and time horizon. Too aggressive goals if unattained will leave you frustrated and you have a tough cocktail to gulp down, while too low goals (very safe) will leave you too little to enjoy! Broaden your horizon and enjoy an enriching supper (we mean investing experience)!
8. Move past your behavioral bias Do you remember when everyone at school told you that first impression is the last impression? Well, we believe that is neither the case with humans and definitely not with investments! There’s always more to a human and your judgement of investments than what meets the eye. Having said that, our cognitive bias based on past views or simply put anchoring bias is one of the most fatal crimes in the world of investments. Let us explain what this is: Anchoring bias is a behavioral bias based on an event that is firmly placed in our psychology that weighs in on our decision-making process. Too esoteric? Here’s a simple example! Suppose you have been following a particular stock rising for a long period of time, and you notice it usually rises again after a certain price correction. Let’s say you observed this happening five consecutive times in the past. Keeping this in mind you were sure it will happen the sixth time and you invested your hard-earned savings into it. So, did you make a right decision? Maybe a yes, maybe a no! The past behavior was imprinted on your psychology that pushed you to make the decision, not the ground level present day research on why the stock fell. Did you ask the necessary questions? Has the company changed its business strategy recently? Did any big investor withdrew their investment? Was it because the company is not fundamentally strong any longer? All these questions beg for an answer, and needs you to dump your anchoring bias. And this is the very reason this point finds a place in one of the Ten Commandments! So, remember never judge based on past behavior, everything can change, investments and yes people too!
9. (1.01) ^365 >>> (0.99) ^365 Rome wasn’t built in a day, neither can be your portfolio. Consistency is an indispensable requisite and sustained returns require moderate but unabated investments. Let us amplify our understanding of this sustained effort by reiterating one of the external principles - The Power of Compounding. To make sure that you relate to this better, we have fabricated two case studies of Miss Patwari and Miss Bhatia. Assumptions The fact that the invest potentials of two cases is identical in unlikely and feasibility of Miss Bhatia to invest 1.2 lac as lump sum every year is bleak. However, we’ve overlooked these aberrations for greater good of our understanding. The Lesson The disciplined investor is more likely to have the last laugh, because discipline outweighs motivation any day of the year. The disciplined investor will navigate volatility in the investments (constantly changing prices) by buying at lows and highs consistently, while an inconsistent investor who banks on erratic investments will eventually loose motivation and in all probability lose capital. So next time, you hit the bar or shop till you drop, remember Ms Bhatia and take note!
10. Build a strong mindset Your investment skill set is as strong and competent as your mindset. So, train your mind consciously. You’ve read it already in our motto. Building the investor mindset! We’ve said this earlier, investment is a mindset, and it would test almost all human qualities. If you’ve mastered your behavior and mindset, you will be able to excel in your investment choices and decisions. We’ve drafted this illustration to list the ‘essentials’ (for lack of a better word) to develop an investment mindset and promise to be back on time next week with your assured share of investment wisdom.