Samvat 2076 begins: 10 pointers to success in the stock markets

Based on my learnings over the years, a ready reference list of 10 key points that I have drawn for myself…

Let me begin by wishing everyone a very Happy Diwali and may this new year brings all of us happiness, good health and prosperity.

A new Samvat brings in new hopes, aspirations and resolutions. All of us into the investing profession, look at the crackling skies with renewed vigour, pray to Goddess Lakshmi, resolve to become wiser and not repeat the previous mistakes.

Spend each day trying to be a little wiser than you were when you woke up -- Charlie Munger Click to Tweet

Over the years, I had many hits and misses. Sometimes it is related to the stock selection itself and other times the entry/ exit timing.

While mulling over these experiences, I jotted down a list of 10 key points to follow in the new year.

1. There is too much of voice and noise

Business channels, newspapers, analysts, pundits, economists, regulators, politicians, peers, managements, bankers, industrialists etc etc etc

Not to say that one should not learn from anyone. However, one needs to cut the clutter and be extremely choosy on whom and what to listen.

If I look into my last 20 years, I can confidently say that it should be your own selection that you should be focused upon. Your analysis reflects your own skill sets and aptitude and someone else’s his. Trying to mix the two is only going to complicate the process.

Infact, I can not remember even a single case where I could generate significant returns based on someone else’s recommendation.

2. Be a keen observer and only invest into something that you understand

HDFC Bank, Asian Paints, Nestle India, Maruti Suzuki, Kotak Bank, Dabur, Bata India,  – these are some of the names that have generated significant wealth for investors over the years.

We are their regular customers and have witnessed all of them grow significantly over the years. Still, many of us kept on ignoring them and instead invested in some other difficult to understand complex businesses e.g., pharma.

3. Focus on Companies that are focused

When I had started, I always believed that more the merrier. More businesses would mean value unlocking opportunities through mergers and demergers. It did succeed for businesses and investors then. E.g., Reliance, GE

However, since then I have realised that the best wealth generation happen through focused businesses. Segments within an overall business proposition is fine but too many unrelated businesses will play the spoilsport – sooner or later.

4. Try to think like a mutual fund manager

This helps me in removing personal biases. When I try to think like a fund manager, I inadvertently start focusing more upon corporate governance, related entities, pledged shares, debt levels, growth trends, peer comparison etc.

It surely brings in more discipline in my approach.

5. I can not be correct 100% of the times

Even some veterans don’t have a success ratio of more than 50%. Stock market investing involves working with assumptions, presumptions and hence uncertainty.

Uncertainty is bound to lead us to be wrong many a times.

6. Prefer Average Up over Average Down

I had written a detailed note on this sometime back – Average Down or Average Up – Which investing strategy makes sense?

Personally for myself, I have realised average up suits me better than average down. It gives me mental peace that my analysis is going in the right direction.

7. I don't need to be invested 100% all the time

Over the years, I have realised that the biggest mistakes happen in stock markets when we do compulsive investing/ trading.

We have this very poor habit of assuming that if we are not significantly invested into the markets, our money is lying idle and not doing anything. In the process we end up giving up our discipline and investing into half analysed opportunities.

Have a look at your past performance and you will agree to what I am mentioning here.

8. Correct portfolio allocation - neither too concentrated nor overly diversified

You will find different opinions around this. Someone will tell you that one stock should not exceed 5% of your total portfolio, whereas someone else would say that even 25% is fine.

There is nothing right or wrong and the correct answer differs as per your own risk aptitude. I have personally found it more comfortable to work with maximum of 8-9 stocks at any given point of time and per stock I am on an average ok to go upto 15%.

9. Manage as if it is someone else's money

This is helpful in terms of bringing some risk averseness in your approach.

I can assure you that most fund/ portfolio managers’ personal portfolio significantly underperforms their client portfolios. Reasons – greed and inability to accept mistakes combined with not being answerable to anyone.

10. Success in stock market needs continuous focus on the basics of mathematics

Last but most important… No exaggeration – this is a fact and the most critical aspect of stock market investing.

  • What is my winning % both in number and value?
  • How much am I gaining on my winners and losing on my losers? 
  • What is my holding period?

Irrespective of whatever investing strategy one follows, a hawk’s eye over these parameters and a keen focus on continuously improvising them can achieve significant results.

I have listed down everything I will greatly focus upon as I step into a new year filled with hope, enthusiasm and confidence. Needless to say, I continue to learn and improvise myself. 

“I believe in the discipline of mastering the best that other people have ever figured out. I don’t believe in just sitting down and trying to dream it all up yourself. Nobody’s that smart.” — Charlie Munger

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