A Ready Reckoner for discipline in equity investing

Handy list that I refer and update regularly. Now open to everyone.

Previously I had written an article titled: Discipline in investing – a known unknown concept

Focus of that article was why and how discipline remains so elusive to most of us investors. It highlighted the reasons for the lapses and hence made us aware.

Being aware definitely helps.

However the dynamics and tempo of the market are such that simply being aware is not sufficient; atleast not for me !

I therefore, over the years have created a list of pointers that I refer regularly; to try reinforcing the same thing again, again and again….

So far it was private to me on OneNote. Now through this post, it’s being made public. (I will also create a permanent link of this on inves4.com homepage for continued easy reference)

Given how extensive this topic is, please note the following –

  1. This list can not be exhaustive. (I will keep updating it from time to time based on my continued learnings and experiences)
  2. I am only mentioning points here and not expanding onto them. Idea is to use it as a quick reference quide. (Though on many points, you may find detailed articles written on inves4.com or elsewhere)
  3. There can not be any particular order to the points. You can refer anything and everything.

Not having an opinion about something is not a challenge to your intelligence…. it’s a test of your foolishness whether you will opine/ act on something that you don’t know

The List

  • Remain humble in markets. Else markets will anyways humble you in due course.
    • The moment you feel that you have arrived and cracked the formula, step back and lie low.
  • Don’t provide stock tips to friends and family (especially who are not professional investors). Most of us indulge into this to prove our intelligence. It has zero returns and is a major distraction.
    • We feel obliged to answer “kya lagta hai” and “kaunsa stock” type of questions. Try avoiding them as much as possible.
  • It’s perfectly fine to use the words ” I don’t know” especially to something that you really don’t know.
    • Accept it or not, we actually know very little and don’t know about lots.
  • Don’t try to predict markets. It just doesn’t work on a sustained basis.
    • Only focus on what you are buying, holding or selling and why.
    • If you still do predict and market moves in your direction – always associate that to your luck and not to any skill.
  • Volatility is integral to markets. Accept that and learn to keep calm.
    • It’s one of the main reason why we sell our most strong stocks (future multibaggers) assuming that we will buy them later and that later rarely comes.
  • Perfection is a myth and that applies equal and more to the markets.
    • Chase optimisation and not perfection.
    • Accept that mistakes and hence losses are part and parcel of any successful investing journey.
  • No investing strategy is right or wrong. Every strategy has pros and cons.
    • No strategy operates perfect under every market condition. Everything will under perform from time to time.
    • What you decide to follow is a function of your own skillsets, aptitude, expectations and risk appetite.
    • Don’t change your strategy based on what someone else says or because of short term headwinds.
    • Keep revisiting yourself and improvise the strategy based on your own learnings and experiences.
  • If you are following multiple strategies for any reason, no harm in trying. But in my experience it rarely works, as you may be diverting from your own aptitude and skill profile.
  • No public analyst, investor has any interest in making money for you. You are solely responsible for your investing decisions and results.
    • Ignore tips on twitter, telegram channels, whatsapp, youtube.
    • Only connect with time tested investor friends, veterans and gurus. Even then, don’t blindly copy them. Only listen to them and take your own independent decision. They are humans too and susceptible to mistakes. Not even Warren Buffett has a 100% hit rate on stock selection.
  • Media runs a business. It’s mostly conflicted and hence should not be relied upon to take any investment decision.
  • There are thousands of listed stocks. You can not own every winning stock. Focus instead on what you own and why.
  • Stock selection is overrated. What’s more important is – Portfolio Management
    • You cannot pick 100% winners on a sustained basis
    • Hence, what matters is – how significant you have invested in the winning stocks and how less you have allocated towards the losing stocks.
    • What you should avoid to buy is more important than what you actually buy.
    • Number of stocks that you are comfortable to own. Concentration or diversification is a personal choice and is a function of your skills and risk appetite. Don’t get lost in the debate around pros and cons of either.
      • Think about the concentration risk of promoter of any business. Market is atleast allowing you to diversify but don’t overdo it as that’s the biggest drag on any investor’s discipline and performance.
      • Own only what you understand and can keep a track of; but don’t overestimate your own capabilities.
  • Every stock moves over different timelines and it’s impossible to time those.
    • No predictive tool works all the time, so don’t fool yourself.
    • Better strategy would be to focus on the underlying business.
    • Don’t keep looking at screen and keep calculating notional profits or losses in your head. This is one of the biggest reason we act in an irrational haste.
  • Supply and demand for a stock is what moves it.
    • There has to be a strong reason for majority to sell or buy a stock – and it’s rarely the valuations and mostly the business prospects.
    • If business performance continues strong, majority will not sell even at high valuations and likewise if business performance continues weak, majority will not buy even at low valuations.
    • High or low valuations need some trigger for market to realise that the stock is over or under valued.
  • Don’t get emotionally attached to any stock. There are thousands of stocks and you only need to own a few to make money.
    • You are not promoter of a business for whom switching may not be easy.
  • Businesses operate in a dynamic environment and face challenges/ opportunities every single day, month, year.
    • Don’t get unnecessarily excited or depressed with short term outlier performances.
    • Don’t give over importance to volatility in the quarterly results
    • Focus on the underlying structural strengths or weaknesses
    • When something is too good to be true, it rarely is
  • Businesses are run by humans, who are same as you and me; they are not some God send angels
    • They are as much susceptible to typical human behaviours like greed, fear, excitement, overpromises, jealously and enmity.
    • Big wealth of the promoters/ managements may be tied up with the Company’s stock price. They are vested to keep it high unless they want to favor their family or friends (including prominent investors) in the short term by allowing them entry at a low price.
    • Don’t get excited by big vision statements or bible like growth/ turnaround presentations.
    • Good managements normally keep it short and sweet and don’t have ready answers to everything.
  • IPOs should be best avoided for at least 2 years post listing. Likely that you will find comparable businesses at better valuations. However, if you are still keen to look at something, keep in mind –
    • IPOs are mostly over priced or at best reasonably priced.
    • They come to markets during bullish periods as it’s easy to sell at high prices.
    • Recent historical as well as Post IPO (2-3 years) financial performance should not be relied upon.
  • Mergers and acquisitions always look exciting. Reality is that they rarely work.
    • Most of the times they happen because investment bankers push for them, who present a rosy picture to the acquiring managements.
    • Aligning culture differences wrt everything including employees, customer service, marketing & sales etc is easier said then done.
    • Synergies rarely work
    • Capital structure takes a hit
    • Management gets distracted
  • Growth and margins are two variables that have the most impact on any stock’s performance.
    • Company’s actual performance relative to expectations on these is the key to keep a track on.
    • While analysing margins, see that they align to the cash flows. Short term volatility in working capital is fine but it should not continue deteriorating.
  • One offs should be one-offs
    • Regular one-offs are nothing but excuses and are actually a reflection of the poor management quality (multiple wrong decisions).
  • Always ignore the headlines. Get into details, take your time and think with an unbiased mind. There is no substitute to this.
  • Don’t become too theoretical in your analysis. Try to focus on the overall performance trend and underlying sentiments about the business.
  • Don’t ever blame anyone else for your investing mistakes.
  • If you are investing your own funds, you are neither competing nor answerable to anyone.
    • Don’t proclaim yourself to be some fund manager and start comparing with popular benchmarks or worst with performances (that too unverified) of your friends.

At the end let me conclude with the most important point.

LUCK

“Luck plays a very important part in anyone’s investing performance. Acknowledge it to remain humble.

However, attribute luck only to your wins and not losses.

Thank God for your wins. For losses, own them, identify what went wrong, and use the learnings to improvise.

Hope you found the list useful.

Please feel free to comment if you don’t agree with something and also with your own additions. I may use them for future revisions.

Other posts that may interest you –

My Buy, Sell Checklist

5 Important Self Realisations; to Improve in Stock Markets

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Naveen Bachwani
Naveen Bachwani
5 months ago

Priceless! Thanks for sharing, Nitin.

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