Our 14th ‘Investor Story’  by :- Author: Jinay Rajpariya for Fund-matters

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INTRODUCTION

Learning how to invest is no rocket science but it is also not a cakewalk. Ordinary Individuals can learn how to invest themselves if they are willing to spend enough time understanding and learning about personal finance as a whole.

To be honest, I have not made a lot of investments mistakes in my 2-3 years of investing journey and this is mainly because I read many personal finance books and most of the books kept repeating certain common mistakes that one must avoid making.

There are many more investment lessons that could have been shared but that would not only make the article long but also boring to read so I have created a crisp list of the investment lessons that I have personally experienced throughout my investing journey. Let us get started without wasting further time

MY INVESTMENT LESSONS

• Don’t be afraid to sell your losers and ride your winners

There is a saying in the markets “Ride your winners, sell your losers”, it may seem like a very easy principle to follow but putting it into practice is a lot harder than expected.

I usually track my investments yearly and I particularly remember a time when I had invested a lump sum amount in 5 mutual funds whose fundamentals were really good at the time, I had invested in them.

The bare minimum waiting period for an equity-based mutual fund is 3 years, however, I tracked by investments for around 2-2.5 years and the fundamentals were getting only worse for 3 of my funds

The beta was increasing and the alpha was decreasing meaning the fund was giving lower returns despite taking on more risk and this was a sign that the fund was becoming fundamentally weak.

I ultimately decided to redeem those 3 funds and was lucky enough to exit at a minimal loss and looking back I do not regret this decision of mine because the funds have further deteriorated

A substantial portion of my portfolio is invested in equity mutual funds, and even though the market has had a crazy bull run I have not redeemed any amount because the funds are fundamentally strong and I want to ride my winners to the full extent possible.

The only question that will help you decide whether to sell your losers or ride your winner is: Are the fundamentals still intact?

•  Start with investing in index funds 

Individuals investing for the very first time should always start by investing in an Index Fund which tracks the Sensex or Nifty.

The primary reason I say this is because newcomers to the equity markets have no idea regarding the volatility of the stock market, since the index fund tracking the Sensex or Nifty will comprise only large-cap companies the volatility will be lesser than the Small & Mid-cap companies.

Small & Mid Cap stocks can at times be very volatile and most of the new investors would certainly panic sell when there is a huge fall.

Once you have been into the market for a while and know its volatile nature you can venture in Small & Mid-cap stocks / mutual funds because if things don’t work out exactly the way you want them to, you won’t exactly be taken by surprise.

Secondary reason being, our initial investment experiences will define our outlook towards investment in general and will play a major role in future decision-making. For Instance, if a newcomer ventures directly ventures into penny or small-cap stocks and loses money then he will have formed a very strong impression that equity markets are a gamble and probably vow to never invest in stocks / mutual funds again.

This is exactly how I had started my investment journey and would recommend the same to others: Start with index funds and venture into Mid & Small-cap mutual funds once you feel comfortable.

• Learn technical & fundamental analysis

Fundamental & Technical Analysis form the bedrock of successful stock picking, both the topics are vast demanding extensive and regular study to build a successful career in investing.

Fundamental Analysis will help one gain deeper insights into the industry in which the company operates and the company itself. It will help you answer the following questions

• What business is the company involved in?
• Does the industry have a huge scope of expansion?
• Does the company operate in a heavily regulated environment?
• Are the board of directors competent to run the company?
• How does the Financials of the company look over the past decade? What are the future projections? Etc

Technical Analysis on the other hand does not delve into the various aspects of the company but helps us to better predict the movement in prices in the immediate future. It requires the study of charts and a whole bunch of other things.

An investor should use technical and fundamental analysis together rather than on a standalone basis, For Instance, if you have narrowed down on a company whose fundamentals are strong but the price is over-valued and you observe that technical analysis points to a big fall in the price of the stock then you can keep the stock on your radar and buy it when the price corrects.

Zerodha Varsity has great material for individuals who are completely new to the investment world.

• Start SIPs / STPs

The statement “Buy the dip” has always appeared vague to me because there is no pre-defined definition of what is classified as a dip and secondly, when there is a huge correction in prices the sentiment turns negative and people put off buying their stocks or mutual funds in the anticipation of a further fall and even if the prices fall further they start looking for the next correction and one day to wake up to realize that the markets have recovered and they missed buying their equity investments altogether.

I have long ago made peace with the fact that timing the markets is the most futile thing to do and I could probably use that time doing more productive activities.

In my opinion, the Majority of the retail investors will be better off if they do not concentrate on “buying the dips” and start a SIP which will eventually help them average the cost of their shares or mutual fund units over a longer period.

SIPs have revolutionized the way millions of retail investors invest in equities, the best part is the money is being deducted directly from your bank account on a pre-defined date, you need not worry about the markets being up or down.

If you have a lump sum to invest and you are afraid that you might end up investing at the market peak then your best bet is to transfer the funds to a liquid or ultra-short duration fund and set up a Systematic Transfer Plan (STP) to transfer a pre-defined amount to an equity mutual fund on a pre-defined date.

STPs & SIPs help you avoid getting into the trap of timing the market.

• Differentiate between your Core & Satellite Portfolio

The core portfolio consists of stocks / mutual funds that one intends to hold for a fairly long period (5 years or more) to fulfill important goals like retirement, marriage or higher education of children, etc

A Satellite portfolio consists of stocks that you intend to hold for a short period with the sole objective of making a quick buck based on short-term trends or exciting news related to the company.

To put it simply, your core portfolio consists of money that you cannot afford to lose whereas the satellite portfolio consists of money that you can afford to take higher risk to obtain better returns and even if you lose a significant chunk of this part, it won’t affect your financial position to such a great extent that may lead to cutting down on important financial goals.

Individuals often tend to mix both the strategies; you have to be able to differentiate between the two or else in the long term it will only lead to disaster.

The best way to differentiate between the two portfolios is to decide before making the actual investment by asking the basic questions:

Why am I buying this stock?
Which Financial Goal does this investment intend to fulfill?

Once you have arrived at your decision then make sure to follow through with your decision with absolute discipline.

• Buy stocks/mutual funds when you have an exit strategy

Every investment must have an exit strategy planned even before the investment is made because without an exit strategy the individual will always be confused.

For Instance, if you are investing for your son’s higher education after 15 years then you must plan to invest in equities for the period of 10 years and shift the money to debt funds completely before 3-4 years of the actual goal.

Attaching every investment with a goal will provide you with more clarity and you won’t panic in case of sudden market movements. There are also higher chances that you may reach your goal.

Individuals should also consider the tax consequences when they are planning for the amount that will be required for a future date for a goal.

Having an Exit strategy is even more important for traders, many traders get in a trade without having a target price at which they will sell. Even if they have made a losing trade they will not exit because they either do not know their exit strategy or do not have the discipline to sell at their stop loss

These traders often turn their short-term trades into long-term investments only because they did not know the right price to sell and are now afraid to sell those investments at a great loss.

•  You need to be right only a few times

The Pareto Principle states that 20% of our inputs will provide 80% of the results, if you have been investing in equities for a long time then you certainly might be more acquainted with the above statement.

Individuals holding a portfolio of 20 stocks should know that 5-6 stocks will provide negative returns, the other set of 5-6 stocks may provide minimal positive returns, the next set of 5 stocks may remain flat and despite all this, the remaining 3-4 stocks will make the entire investment gain worthy.

If you are one of those who expects all your investment picks to be 10, 50 or, 100 baggers then you are certainly playing the wrong game.

You only need a handful of stocks / mutual funds to make a fortune in equity investing and it will be more than enough to make up for all your losses along with providing you inflation-beating returns in the long run.

Charlie Munger had once said in his interview that if one were to remove the 15 best investment decisions, he and Warren Buffet made then their returns would be pretty average.

The important point I am trying to make here is that throughout your investment journey there will be many investments that will fail or not provide meaningful returns but you do not have to be discouraged by that and stop looking out for the next opportunity.

If you invest Rs 10,000 in stocks/mutual funds then in the worst-case scenario you will lose all your money, but even if things work out well a few times you stand to turn that investment into Rs 1 Lakh or 2 Lakhs or even higher. The downside is limited but the upside is limitless with stocks.

•  The ultimate goal of investing is to provide peace of mind 

Investing should not be done at the cost of one’s peace of mind, if you as an investor are losing sleep concerned over your portfolio’s high allocation to equities then it might be a good time to shift some of the funds to debt or other avenues that you feel will provide you with a higher sense of security.

I have allocated around 80% of my portfolio towards equity mutual funds but I contribute the remaining 20% into my PPF Account and I have been met with objections from many people suggesting I contribute the entire 100% towards equity since I am relatively young in my investment journey.

The sole reason I allocate a small portion of my portfolio in PPF is that I prefer to have the peace of mind that even if the equity markets wash out my entire capital, I have some portion allocated to a completely risk-free product.

As Morgan Housel says in his book “The Psychology of Money”, We humans are not spreadsheets but creatures filled with emotions thus we should not aim to be rational but reasonable.

I would choose peace of mind over the extra returns any day in my life!

• Don’t always try to be innovative while investing 

Nowadays everyone, right from your parents to social media influencers will tell you that you are unique and advise you to create your path.

However, one would have a higher chance of creating great wealth by following the absolute basic principles of investments that Benjamin Graham or Warren Buffet have used over the years than someone who is always looking out to build new and innovative strategies of investing or trading.

Do not reinvent the wheel when it is not needed, the simple question being “Why try to recreate a path when you already have a path travelled by various successful investors?”

In India, we already have more than enough mutual funds required to confuse any ordinary investor and now the Asset Management companies are coming out with Smart Beta Funds or Funds focused on a very specific niche or sector. In my opinion, these strategies are relatively new and have a very narrow mandate that will only add to the confusion for retail investors.

Always keep your investments as simple as possible, it is way better to own a portfolio of 20 quality stocks that you have studied or 2-4 equity mutual funds whose fundamentals you have properly analysed rather than trying to learn new and complex investment strategies.

•  Flipping between stocks or mutual funds does not help 

Equities have never delivered linear returns throughout their history, there will be elongated periods when the equity markets do not move an inch or have been in a downtrend and this is the time where you as an investor have to be the most patient.

Similarly, every mutual fund or stock will have its periods of outperformance and underperformance thus if you are one of those investors who invest only in funds topping their category or only because they have a 5-star rating on value research then you will be sooner or later be disappointed.

If you are a mutual fund investor then certainly you will need to analyze the technical aspects of the fund such as beta, alpha, past performance, etc however these ratios do not stay the same and change over a period. The fund which may have topped the charts might now be somewhere in the middle quadrant so what is the solution to this problem?

The only solution that has worked for me is to invest in funds whose fund managers I have read interviews about or have been in the markets for over a decade or so and even better are managing the same fund for a long period.

Ultimately, in a mutual fund, you are betting on the fund manager and if you have faith in your fund managers ability to generate returns over the long haul then you will not be much disturbed by short periods of underperformance

Similarly, if you are an investor who invests directly into equities then you must invest only in companies that you have studied very thoroughly and fully believe in because that is the only way you as an investor can get through without panicking when the stock is not performing.

Flipping between top-performing stocks or mutual funds is a sure-shot way of destroying your investment capital.

CONCLUSION

In conclusion, these are just a handful of investment lessons that I have learned about throughout my short investing journey and they may not replicate the investment lessons of others. However, if you are a newcomer in the investment world then these investment lessons should serve as a guiding light.

As you start to spend more time in the markets and learn new things, you shall learn to build your investment thesis and that shall mean that you have matured as an investor.

About the Author: Mr. Jinay Rajpariya,

Jinay has interned in various fields ranging from marketing to auditing and is currently interning in finance to learn in greater depth, about financial planning. Jinay is CFPcm who is fascinated about helping people manage their money better and has a keen interest in studying various aspects of personal finance. Apart from being an avid reader he enjoys writing blogs related to personal finance. He aims to educate as many people as possible about money and help them achieve financial freedom.