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Why investors lose in the market
It’s not rocket science.
I made my first investment when I turned 18 years old and I’ve invested in a lot more winners than losers. The most ROI I’ve made is ~1000% (PAGEIND) and the most I’ve lost is ~36% (AYMSYNTEX). I still own both stocks.
I don’t say this to brag because trust me, I’ve made a lot of stupid mistakes along the way, but I just want you to have a frame of reference when I say this:
What differentiates a pro-level team like Manchester United from your local football team?
Sure, they’ve got better players, affluent sponsors and rich (and possibly corrupt) owners, but that’s not why they win. They win because they have a solid game-plan every time they take the field and it’s executed to perfection. Strategies win matches. That’s why strategy-makers get paid the way they do.
So why should investing be different?
Millions of dollars are lost every day because investors invest without a game-plan. Or they lose faith in their strategy and do irrational things because they didn’t believe in their strategy in the first place.
I admire Tom Hanks a lot, as does just about everybody, but just because he’s a practicing Christian doesn’t mean I need to be one. Similarly, just because Warren Buffet stays away from Technology stocks doesn’t mean I should too.
Different strategies work for different people and there are pros and cons to all strategies. For example, Warren Buffet regrets not investing in Google when he could have way back in 2000. No strategy is perfect and you shouldn’t bother trying to develop a perfect strategy. Come up with a few thumb rules that make sense to you and reflect who you are and start from there. Getting stuff done is infinitely more important than getting stuff right.
On that note, here are a couple of things I’ve found that work best for me.
Most traders feel every stock is fair game as long as they see an opportunity to make money off of it. Ironically, this is also why most traders seldom make money. I’m a lot more selective in my approach. When I invest in a company, I’m owning a small part of it, and I take that very seriously.
If you could be the CEO of a company, would you like it to be just any company?
No, you’d want the best. So why settle when investing?
For me to get excited, I have to buy into their story. Their past, present and future plans should resonate with me. Stories are incredibly powerful in investing. Humans are story-driven creatures. Given a choice between a complex, number-filled spreadsheet and a Michael Bay movie, most people will still pick the movie.
Stories are vital to investment analysis too. Uber can go from being at $17BB car-rental company in 2014 to being a $100BB logistics company in 2017 just by changing their narrative a little bit. It’s all in the story. How the companies tell their story, what their promise-land is and how they plan on using their current resources to get to the promise-land is what I look at. Stories need to be backed by numbers after all.
Apple demonstrate the importance of a good story better than anyone. When Jobs returned to Apple in 1997, he had but one mission — dominate consumer electronics. The iMac dominated the home desktop market and bought Apple back to profitability. The iPod dominated the music market. The iPhone dominated the mobile phone market. The iPad dominated portable computers — even though Microsoft had tried it 10 years prior. The iWatch dominated the smart-watch market. What next? There’s word Apple might be developing electric cars.
There’s a consistent story here. A story you can keep track of. A story you can easily understand. A story you can see is supported by numbers. A story you can’t wait to get a piece of. That’s what I look for in a good story.
How much would you pay for an envelope with a $100 in it?
If your answer is $100 or more then you just don’t get investing because your goal at all times must be to maximise your profits by limiting your risk. I feel Indians are incredibly well positioned to be great investors. We’re raised in a society that understands the value of every last rupee — we don’t tip, eat out or donate to charities. Money given away is money wasted and we’re well aware of that.
So why not leverage that innate cheapness to our benefit?
People get influenced by others way too easily. Just because the stock price is going up doesn’t mean you should buy and just because the stock is crashing doesn’t mean you should run away from it. Once I understand a business, I like to throw out an anchor — my assessment of the stock and a price that I can consider investing at. If the stock tests those level, I buy it, but if not, I move on. I don’t buy just because others are buying.
CUPID is a stock I was tracking in mid-November 2017. The stock was priced at ₹255 but I had it valued at ₹240 which meant I wouldn’t buy it for anything more than ₹220. I thought if I waited just a couple more days (or months) all would be good. But I was wrong. The stock skyrocketed 65% in less than two months and it fell off my radar (it was way overpriced at that point). I kicked myself for a day or two but I moved on.
I circled back to it in a few weeks and noticed it had crashed 40% in just one month! CUPID is back on my radar and I can’t wait for it to touch ₹220 so I can buy it. What goes up must come down — it’s practically Newtonian. Standing your ground and haggling like an Indian really pays off in the long run.
When you spend as much time as I do reading up on companies and assessing investments, it’s easy to get swept up in emotion and over-invest. You’re always going to think the investment you’re about to make is the greatest thing ever because you’ve spent so many hours on it. It’s human psychology.
To fight that impulse, I stick to a simple formula.
I start with a trade that’s no more than 2.5% of my portfolio. If the stock does well, I bump it up to 5% and if it exceeds expectations, it goes up to 10% of my portfolio. At no point do I hold a stock that’s greater than 10% of my portfolio. I might sell some of it, wait for it to crash and buy on the bounce. But I’ll never keep more than 10% of the same stock in my portfolio.
Sure, I may miss a little bit of the upside, but I’m severely limiting my downside by sticking to this simple habit. A lot of my friends went all in on cryptocurrency and needless to say, it didn’t end well.
“Patience? Seriously? That’s not a strategy, that’s common knowledge!”
Sure it is, but you’d be surprised how rarely people actually utilize this seemingly common knowledge.
Buying a stock for cheaper than it’s worth usually means the market isn’t aware of its true worth just yet. So when will the market realise its mistake and skyrocket the stock price? Who knows. And thats the difficult part. Investing isn’t like playing Tennis. There’s no back and forth. Its not high-octane drama. It’s like playing Chess. You make your move and you wait. That’s all you do. Wait.
I bought MERCK in 2016 for about ₹650. The stock plummeted to ₹630 in the coming weeks so I bought more of it because I believed in the company’s potential. The stock barely moved for the rest of the year. The NIFTY50 gained 24% that year while MERCK only went up 11%. I felt like an idiot.
December 2016 started an incredible bull run for MERCK — it’s made me a 160% return and I feel it could go up even more. Had I sold the stock after a lacklustre first few months, I’d have missed out on an incredible investment. Investing is as much about having the right cards as it is about having the patience to see them play out.
The stock market is a manic depressive and if you go in without a game plan, you will lose. It’s way too easy to get caught in the herd, to listen to the wrong kind of advice and do things because everyone else is doing them. An investment strategy helps ground you. It anchors you. It gives you perspective. And when things hit the fan, a clear perspective is what you need the most.
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