The market is similar to an ocean, there is just too much information to assimilate, process and analyze, an investor needs to make sure he/she is on the right kind of a boat while traversing the rough ocean waters.
Recently, I was re-reading some of the very insightful interviews of reputed investors which Vishal (Safal Niveshak ) has been gracious enough to share with. This gave me an idea to conduct a small experiment
So my friend and I decided to conduct mock interviews of each other, to better understand our thought process, I have listed some of the questions we covered:
- Why do you invest in the stock markets? Isn’t it too risky?
- What stocks do you usually invest in?
- Where do you find good investment ideas?
- How do you decide which ideas to buy and which ones to let go?
- What are your return expectations from the markets?
- What???? Just 20% P.A, don’t you think you should be making more, at least wanting more?
- What percentage of capital is allocated to each idea of your portfolio?
- Do you buy into the full position at one go or in stages?
- How do you decide when to add more to your existing holdings vs adding new positions?
- When do you sell? What factors do you consider before selling?
- Do you sell the entire holding together or in stages?
- How do you handle your emotions when stocks you own are losing or appreciating in value ?
- How do you develop conviction to hold on to stocks in spite of a huge up/down move?
- What is your typical holding period?
- Do you meet management of your portfolio companies?
- What has been the worst performing stock idea for you?
- How do you ensure downside protection, prevention of capital loss?
- How do u handle and process the constant stream of information? How do you cut down the noise and clutter?
And so on…
To my utter disbelief I flunked this interview big time, I realized, I had no objective and concrete answers to most of the questions above.
This was a great learning experience, it forced me to think these questions through, I sat over the following weekend and wrote down the answers to each and every question, not only did I feel more confident but it made me more aware of my temperament and inherent personality as an investor.
The future is unknown and unpredictable, however managing risk is something we can control and influence, writing and documenting in detail, your entire investment philosophy and process can take you one step closer to that, it forces you to acknowledge the chinks in your armor and rectify the errors in your decision making process.
Go ahead, see if you can pass this interview, if not introspect. Repeat.
Investing can be as simple or complicated as you make it to be. I’ ll share a personal example:
I used to be in awe and often get overwhelmed on reading these brilliant analyses of companies and concepts on various blogs across the internet, ” Wow how am I ever going to get so good” or ” I am going to start reading 6 hours a day, everyday (orders top 10 recommended books from Amazon)”.
After passing through a period of mindless reading and running about to various seminars ( which promised the fruit of identifying the next multi-baggers ) in the pursuit of gaining nirvana, I ended up with a 10 page framework and check list to analyse companies. I thought to myself ” Now, finally I am going to crank up those returns and become the best money manager ever”
This feeling did not last long, for 2 reasons:
- As I progressed, I realised that most of it was repetitive and as a result I had to think and write the same points over and over again and it took a really long time to finish researching a company
- The framework itself was so vast, it was intimidating, most times as I sat down for research, to my surprise, I was bored rather quickly
On some introspection, I understood the following:
- Your only competition is yourself, focus on absolute returns
- Understand that knowledge grows gradually with time and experience
- Reading the wrong kind of stuff is very dangerous
- Reading too many books too soon will not add optimum value, it takes considerable time to absorb concepts and ideas of each book, relax there’s a lot of time, one book at a time, slowly
- If the idea is not appealing within the first 30 minutes of the time you spend understanding it, it probably never will be
- Luck plays a huge part in determining returns, it is often futile to know everything out there
- You are not really investing in the business itself but on the probability of the business doing well in future
- Your investing strategy must suit your temperament, different things work for different people, find what works for you
- There is no superior or inferior analysis, only returns
So what do I do?:
- I read about 1 book every other month(related to investing) and I am really choosy about what I read
- My investing framework is only 2 pages
- I usually complete my homework on the company within a couple of days max
- I try and know enough to understand if the business is going to do well 3-5 years out, My focus is generally on the larger picture
- I avoid crunching too many numbers, future is unknown, I’m good if I like the business model of the company and the people running it
- I allocate minimum capital at the start and keep adding and averaging up as and when I get more comfortable with the business and the management
- I follow very selected blogs of people I admire and which I believe can add good value to my investing life
- I don’t watch stock prices very often specially of companies I am invested in
- I often write down stuff rather than typing
The investing process has to be fun, engaging and most importantly simple!
Hope this has added some value to your investing journey!
Here’s another one in this series:
1. The “Bubble” in quality (Click here): This one is really insightful, it makes you think about what kind of expectations are built into the stock price and what returns you are willing to settle for as an investor
2. Holding companies (Click here): Interesting article from Neeraj, whose blog I follow regularly, this one throws light on how one can go about investing in holding companies
3. Conviction to hold (Click Here): This one is a must read, it gives a very good insight into how one can and should develop conviction to hold companies they own
4. Jealousy & Envy: (Click here): This one is a very good read written by Vishal at Safal Niveshak, do make it a point to read this
Just a small compilation of some very good articles and posts I have read over the week :
1. What happens when you lose sight of prudent risk management – Disastrous story of a fund manager who lost close to a $100 million in a matter of weeks.
2. Another brilliant post from Prof. Sanjay Bakshi – This time its an idea from the e-commerce sector, it’s a brilliant read.
3. How to spot a 100 bagger – Raamdeo Agrawal on how to spot large trends and companies with huge potential, make sure you read this over the weekend.
4. Keeping things simple – Immensely insightful post from on of my favourite investing blogs, more often than not,one needs to weed out all the clutter and keep things simple and straightforward.