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Saturday, February 29, 2020

The Most Important Element of Investing? Part One

Here I was sitting at the office of an astute investor who shall remain unnamed but not unsung because in the two hour long dialogue we had the most important thing that he said and which I have known for many years is that when it comes to investing(of any kind) but especially equities what is critical is not IQ or knowledge or technicals or global conditions.

It is PSYCHOLOGY. Know thyself and your portfolio themes and returns become inversely proportional !

After much research,and I presume soul searching,you have bought a stock and it tanks 10%. How do you react? Do you sell if you see it going down? Do you hold on as after all you did do a lot of due diligence?Do you blame the markets, your financial advisor, the Gods in general or your luck?


Buying into a stock and in the case of a long term investor let's call it buying part of a business is easy as you please. Its where you exit is what makes it a critical left brain exercise( Oh yes I have read  Daniel Kahneman!!). It will determine your return.Holding stocks for years in your portfolio and then selling too soon or too late,plenty of examples of both - viz. Bajaj Finance,Dmart for the former and Yes Bank and DHFL for the later.

Many investors have generated multi returns in infrastructure in 2002-2006,in real estate in 2009, Metals in 2014 hence its not the underlying stock that is bad. Its your decisions that determine whether you gain or not.

I have met investors you wanted to sell every time the markets fell
I have met investors who wanted to hold on till their holdings became nil. This  vacillation between fear and greed looks cut and dried but is one of the most difficult decisions you can be called upon to make.
To see a stock that you held for 8 years and sold and then it tripled - yes it happened with HEG and Graphite in 2018

Jumping to conclusions,anchor bias,dependabilty varies from person to person. The good thing is that everyone has vices per se. None are Norse Gods blessed with 20/20 vision and that is what makes markets interesting.

Some jump in and buy at the first fall some wait for the prices to fall to their level then wait some more as they feel it might fall further.

As a Wealth Manager it is not my job to lecture on the psychology of investing. It is to try and manage risk through portfolio allocation.I ahve recommended Mid and Small cap stocks in portfolios that are down 10% in 2 years but  my SUCCEESS is that none has stocks that have gone down 30-90%  so my client investors stand to gain anytime the economic conditions get slightly better.

The Corona virus COVID 19 has in the meantime taken on a global role. The Dow and Nasdaq were looking for a reason to correct but my understanding is to look beyond the immediate scare mongering. It is true that 70% of the people might be infected in a year but its mortality rate of 2% is far lower than preceding pandemics.

Once the initial panic is over the recovery is likely to be V shaped. In the meantime its a good opportunity to shore up old portfolios or create a new one. The 1% who will have the courage to invest when there is blood on the streets will have the last laugh!

I would also suggest a gradual allocation to commodities(If  you remember my 2017 blog I was bullish on Gold in April 2017 it was trading around 28K on MCX) more on Silver(currently around $17) and Crude around $40 as a hedge.

If you are a long term investor have the courage to buy in tranches if you cannot stomach the volatility try Mutual Funds. If you do not have access to Research try ETFs. 

To have a passive secondary income its important to have equity as an asset class as part of your portfolio. Remember what happened to Debt last year ?