Easy tips & tricks to help you become successful investor
1st thing that comes into our head while thinking about any investment is the returns it would derive. What we most often miss out is the risk associated with it and our tolerance to accept it
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In over a decade of my writing, I've spent many New Year articles about the futility of making resolutions and how majority of such fructify, substantiating with data and surveys reports. So, I'm not going to indulge in another such article to build new resolutions over savings or investing but would like to collate some of my learnings which are timeless. I would like to compile 12 such ideas that could make this year worthwhile.
The first thing that comes into our head while thinking about any investment is the returns it would derive. What we most often miss out is the risk associated with it and our tolerance or threshold to accept it. Morgan Housel had once explained about risk very beautifully as 'the odds you will get hit', 'the average consequences of getting hit' and 'the tail-end consequences of getting hit'. We tend to assume risk in the averages while the actual risk could be lot worse than could be digested.
Another biggest lesson is the time spent in the market but not timing the market. We believe that we could get better returns by timing the market lows and exiting at the peaks. In the formula for compounding, the exponent lies in the tenure and not the rate of return. We mostly ignore which run after trying to maximize returns. Timing certainly has benefits but is always not possible and even if one managed then it could be luck.
This is another aspect which we often discount for our skill. Nassim Taleb argues that change plays a larger part of our lives than many of us are willing to admit, which we often interpret as being anything but random.
It's important to accept that no business and hence no stock could be profitable forever. No, I'm not against holding a stock for long time but one must be wary that all businesses, however profitable are, would run into competition and at some point, could lose their competitive advantage. The trick is not just to identify a business moat but find a business which could sustain the moat for a long time.
Quality businesses hence trump than those of momentum ones. Though, the latter could provide a great fillip to the portfolio and hence should have an exposure to such stocks. This brings up to another pertinent point i.e., to create a portfolio. A portfolio of stocks always helps navigate the market gyrations and the economic vagaries that are abound. Diversification thus helps in making a portfolio resilient to these dynamics and the best diversified portfolio has lower related businesses. This allows the portfolio to generate better non-correlated returns while minimizing the risks associated.
Conviction and humility go hand in hand, in investing. Without conviction one can't make a bet on a stock, at least, much before it's known to others. Conviction should come from the analysis and assumptions do play an important role in how we end up with the forecasts. So being humble allows us to reassess our assumptions and thus our conviction to adjust our initial thesis.
In follow-up to the above argument, many investors striving to succeed, try to prepare a water-tight strategy and so employ variable that they have utmost control over. What we tend to forget is to draw distinction between what could be controlled and what can't be. For instance, pursuing a pre-fixed return would turn disastrous, as all that we have control of are risk, timelines and importantly behaviour.
The most underrated feature of investing is the behaviour. It's probably one thing that could make or break investment success. While most of us employ various types of analysis like technical, fundamental, algorithmic, etc. it's our behaviour that trumps. As Warren Buffet once said, it's not how the markets react to the news but it's how we respond to the market's reaction defines our returns.
Zero-in on behaviour, it's critical to know self before indulging in stock markets. Adam Smith in his book, The Money Game, wrote 'if you don't know who you are, stock market is an expensive place to find out'. While there are innumerable successful approaches to investing, one needs to be aware of what suits them the best. This self-awareness would pave way for not just good returns but a great investing experience. Happy New Year and happy investing.
(The author is a co-founder of "Wealocity", a wealth management firm and could be reached at [email protected])
