Learning the game

Five Lessons from my journey as a full-time investor

In my earlier post, I discussed psychological challenges I faced during my three years of full- time investing. There were suggestions to share investing lessons I learned during this time. I will try and share my experience.

Over 3 years my performance is definitely better than the small cap index or some good mutual funds or PMS in the category. However, it is not an extraordinary or excellent performance. Every player thinks of how to improve his game. Following are some issues, I feel, if managed well, I can improve my game.

1. Clarity in investing purpose: It is essential to know why are you playing this game of investing? Over three years I have realized that if you really like the game, have the sufficient capital, willing to learn then only one should go for direct investing. For first two years, I was in dilemma whether I should continue direct investing or move to mutual fund/ PMS and pursue something else. My mental bandwidth was not utilized fully. After going through pain of last 18 months and realizing that I still enjoy this I gained clarity. Many of my friends to whom I talk to, have never calculated their own returns and still spend considerable amount of time buying, selling and talking about shares. My genuine suggestion to the most would be, not to deal directly into stocks but use mutual fund or PMS route and concentrate on raising income earning capacity in your own business/ profession or job you are currently working in. Generally, stock market is not a place to earn money, but to increase the wealth you have already acquired.

2. Know your game: Everyone enters the stock market to make money. This game can be played in different ways. I think, the earlier you know what game you’re playing; the better it is. For me, having lost my entire capital of ₹15,000 in late 90s in IPO, I had left that game. I had also paid sufficient fees in derivative markets to know that it is not my game. I got little bit entangled into momentum versus value game. Listening to concepts like buying pessimism or buying into strength or follow trends or follow techno-funda style got me confused. All these concepts are correct in theory but implementing them is different game altogether. I knew I don’t have temperament of a trader, so trading was never my game, but I wanted to try combining technical and fundamentals. I could not get it right. I was confused whether I should follow fundamentals or combination. I went back and forth. I won’t say any system is right or wrong, but you have to select a particular way and stick to it for a long period of time. This comes from experience after dabbling into it and also looking into yourself. I realized I naturally lean towards fundamentals. Know yourself (KYS) is very important. Trying to play different games at the same time is difficult. For most people it would be the case. Rakesh Jhunjhunwala was an exceptional phenomenon who used to manage trading and investing simultaneously with great results.

3. Understanding cycles: Coming from an accounting and business background and being a warren Buffet fan, I was influenced by concepts of buying a business, holding it for very long period etc. In my earlier stint as a part-time investor, I had made good money in stocks like Sintex, DHFL to see losing entire capital in those stocks. I did not learn from those mistakes. In current stint also many stocks made handsome returns, but to give it back to the market in last 18 months. Slowly, I am understanding that everything works in a cycle. There is an economic cycle, a business cycle and a market cycle. There are ways to understand these cycles and to take benefit out of it. There is no point in holding the stock after it has gone up in an upcycle only to see it stagnate or decline in the down cycle and wait years for recovery.

If you have substantial large capital, then in that case maybe, buying and holding forever may work, but when you have a small capital and you want to compound it fast, then I think you have to use these cycles to your benefit.

Also, I realize that very few companies would qualify for real long-term holding and if I find such company then I should hold for long period of time. But generally, I would be better off selling at upper band of business / market cycle and investing into companies that are in down cycle. Let’s see how I am able to implement it in a better way.

4. Portfolio approach: Once I started measuring my performance, I realised the importance of portfolio construction. Ultimately, it is important to see how portfolio as a whole is performing rather than a single stock. Afterwards, I stopped casual discussions with my friends and relatives about a particular stock since they don’t appreciate and I know it is not going to make much of a difference.

I used to feel great about multi-bagger returns in stocks like Neuland Laboratories or Indian hotels, but my allocation was only 1 or 2%. So, the impact on the overall portfolio was limited. Warren Buffett has famously said that over diversification is protection against ignorance (under work).

In reality and mentally, it is difficult to follow this practice. I find it difficult to go beyond 3 or 4% in one company. I know lot of hard work still needs to be done to develop the conviction. I think, it is better to understand yourself and manage your return expectations accordingly. I can’t be a timid, over diversified person and expect an outsize return.

5. Asset allocation: Actually, it is the first step for any investor to decide his asset allocation i.e. division of assets into various categories such as equity, debt, gold, international stock etc. It is completely an individual call, depending on his age, financial background, risk taking capability and ability. I know I am a conservative investor. I had around 40% in debt and that gave me cushion during these 18 months. However, I had 0 allocation to gold. I had this preconceived notion that gold is an unproductive asset, no cashflow etc. And in spite of my wife’s insistence, I have never invested in gold, now to listen to every day about my foolishness. One thing I realised that one has to have an open mind without prejudice and willing to learn. So now anyone starting a new investment journey, I would suggest small allocation to gold.

These are some of the aspects I am working on to improve my game. There is no alternative to hard-work and if luck plays its part, things should work out better. Role of luck can’t be underestimated.