- Do you invest based on someone else’s recommendation?
- Have you tried to copy the portfolio of some veteran investor?
- Do you exit based on ‘Mayday’ calls by news anchors or stock analysts?
- Are you frustrated because your stocks are not moving compared to your friend’s?
- Do you regularly churn your portfolio to catch on the flavor of the season stories?
- Do you keep switching from a short term profit taker to a long term fundamental investor?
If answer to any of the above is yes, then actually you are not playing your own game but someone else’s !
And it’s never going to work……
atleast not on a sustained basis – a key requirement for long term success in the stock markets.Why?
Every stock investor is unique – has his own skills, risk aptitude, return expectations, investment horizon, capital at play and also his ethics !
Therefore, though we believe that we can succeed by copying someone else but our own unique mix of above traits becomes a hindrance and in the process one becomes – “na ghar ka na ghaat ka”
All of us admire the success of Warren Buffett and many of us are also the disciples of his value investing approach.
However, rarely any of us have his –
- Patience – of real long term holding – if our stock doesn’t move for 3 months we are anxious, forget about holding it for 30 years
- Clarity of thought – of what he will invest and what not – whereas we keep on looking at every sector and every Company and that too superficially
- Conviction – of not getting anxious by fluctuations of Mr. Market – compare this with our ability to hold through a stock when it corrects by even 20%
Result – we believe that we have copied him, but actually we have not.
Likewise, if we reflect back on most of our actions, most of the times we are trying to play someone else’s game than our own. E.g.,
- Investing into commodities because it’s the flavor of the season, whereas one may not understand anything about it
- Quickly exiting based on a technical recommendation on a stock, whereas one’s approach is purely fundamental
Your own game, of which you set the rules – is your best possible shot at succeeding in the stock markets
There is no game that is superior to the other or which ensures a better success rate.
One should be satisfied that he played well and was mostly in control of his actions. Mastered this, returns are bound to follow over time.
There have been proven successful people of all kinds following all kinds of strategies in the stock markets. It can be turtle, momentum, swing, value, techno-funda, algorithmic or anything that you have identified matching your own skillset and aptitude. Everything has a potential and can work, if followed with a discipline.
Why then there are not many well known success examples like Warren Buffett – because most didn’t follow their own rules for long enough. Most of them became too greedy after the initial success.
What are these rules that one needs to decide upon?
For me, what defines Warren Buffett’s success – Consistency !
Before deciding the specific rules, the most important thing to analyze is one’s own skillsets, personality and aptitude. Everything else should follow after this.
- Confidence about one’s own analytical abilities
- Ability to cut through the noise
- Capability to absorb large drawdowns
- Return expectations
- Ability to sit through without doing anything
Many of the above factors are integral to a person’s personality and are not easy to change. Rules should be decided accordingly. They can always be modified as a person evolves.
Coming now to the rules –
1. Portfolio Composition
- Liquidity levels – i.e., minimum and maximum cash holding across different situations
- No. of stocks – lower the number, closer the monitoring but higher the risk
- Sectoral diversification
- Leverage, if any
- Role and strategy of future and options
2. Stock Identification Strategy
- Top down or bottom up – i.e., based on macro view about a sector or micro view about a Company
- Fundamental or technical or a combination of both
- Talk of the town or hidden gems
- Large cap, mid cap, small cap or micro cap
- Focused tracking of limited Companies or open to anything and everything
3. Entry price
- Fundamental based on valuation parameters or technical based on specific indicators (moving averages, volumes, RSI, MACD etc.)
4. Holding period
- Long term holding of good businesses or short term momentum/ swing plays
5. Monitoring strategy
- Active or passive – every development or selective significant ones
- Self research or external research/ credit rating reports or both
6. When to sell and at what price
- Based on fundamental or technical parameters or both
- To make space for a more compelling story or not
Above is by no means a comprehensive list and one can decide his own rules on various other things. E.g.,
- I have stopped watching any business news channel for last 3 years and I am much better off. My adrenaline is more controlled and it allows me to think independently.
- I rarely get into discussion of stocks with anyone.
- I attend various quarterly results calls but I have an unwritten rule of never asking a question. Reason – it helps me in focusing more on management’s tone of responses and hence their quality. Questions anyways are mostly asked by someone else.
- I have stopped doing over analysis of numbers and is focused more on identifying the overall trends.
- I have decided to focus more on the quality of disclosures than getting excited by the headlines.
I believe all of us unconsciously have our own rules of the game. However, there is so much of noise everywhere that we get excited, competitive and fearful. In the process we compromise on our own rules and act in haste.
The problem worsens when any of this breach of rule helps us in making quick bucks or save from a short term pain. Result – we start breaching rules again and again. In long term, this does nothing but create frustration and disappointments.
I hope to have given you sufficient material to think upon. I am setting my rules and continue to improvise. Hope the same for you !
Some other articles you may find useful
- Stock selection: Key hacks to avoid big mistakes
- Why stock prices decline when you buy and increase when you sell ?
- Stocks: when to sell? – Part 3
Illustration Credit: Vecteezy.com
Nice article again, Nitin ! Sometimes the simple things are the most difficult to follow.
One more thing for people to follow is : not look at the markets everyday. I have been victim to that 🙂
maza aa gaya … a nice read !!
Learning Curve is too broad for a few like me, better late than never!!
even i’ve stopped attending Concalls over past 6 months… transcript is available anyways the same evening these days.
it so happened i pushed the MD of a Radio Company to an extent , he meticulously accepted he was helpless (Gave me a sell trigger) and there was no improvement visible in business shortly and i was out the next day. i booked 30% while markets were roaring, and i was startled that i missed being in other stocks. Stock was down 20% in a few days….
although already decimated and i am seeking re-entry, yet why not book some kharcha pani
I am happy that i can speak my mind here…. there were others whom i raised alarm…. to no avail!!
was told, no prizes for feeling over-smart, unfortunately none for the humility too. neki kar -joota kha!! LE LO MAZZE abb 😉
A good read, hardly anybody writes with this frankness & it’s up to your readers to pick up your tips & style of handling the market. Look forward to your next……..
Thank you Nitin bhai for this article. I am following you & already thru twitter shared an EXCEL table of model pf txns and you replied also. as of now I mostly prefer Ichimoku indicator along with RSI for my entry since one and half year only. Many times my entry is correct, but when shakeout happens I could not control and closing positions, seems not fully able to control my emotions. But I strictly maintaining 0.5 to 1% risk of capital on each trade. FOMO happens many times. I shared JK Tyre chart in your timeline in twitter. anyway I would like to learn more from you. .
I am still confusing between part booking at various profit %s and fully booking when structure shows bearishness or indicators signals to exit. Trying to develop patience in my trading journey… Please spare a min. to reply me when I request for a clarification.
Regards. Kumar from Andhra