The Realist Investor: Traits for improving your chances of making money in the market
Hi there, Today I am writing on a generic topic. Although, a lot has been written about the personality traits to be a successful investor. I thought on putting emphasis on what will help you in improving your chances of making money in the market. From my experience, what had helped me make money in the market are summarized as the 10 traits below:
1. Emotional control: You need to be extremely calm. Never let external circumstances influence your decision. Every now & then, there are some news about the company.
Based on which there are wild price fluctuations. One needs to carefully examine the impact of such news or even such news are true or false.
IN MARKET, GOOD NERVOUS SYSTEM IS MORE IMPORTANT THAN GOOD HEAD.
2. Conviction on your guts: Once you have taken the decision of purchasing the stock, you need to have the ability to weather the ups & downs as long as the company is performing well.
There is a lot to learn from Radha Kishan Damani for his ability to have unwavering faith in his decisions.
3. Quick to rectify the wrong:
Nobody can be perfect in making decisions. Even Warren Buffett makes mistake. Some of his mistakes I am aware of are IBM, Tesco, Berkshire Hathway(his biggest mistake) etc
A realist investor would be the one who after having made a mistake, is quick to cut the losses. Most of the retail/small investors/speculators after making the wrong investment become long term investor hoping to recover their original cost which seldom happens.
Learn from the mistakes & move on.
4. Leaning machine: You need to improve on every mistake that you have made. Not only that learning is infinite and one always needs to improve themselves for the better. Be it better investment style, fresh process of selecting companies, prepare a checklist and keep adding items to it and the list goes on. Warren Buffett is one of the well-oiled learning machine.
5. Ability to take a reasonable risk: When you are analyzing a company and in particular when its a small or mid-sized company, the available information about the co. as well as the sector might not be available. You might need to gauge from the whatever enough information(make sure you have some minimum sufficient amount otherwise it’s just a bet), one can collect and will have to take a certain amount of risk.
While analyzing Bhansali Engg polymers, about 55% of the Promoters share was pledged. Although everything else looked fine, I took a reasonable risk & I bought the stock in bulk. I could have emailed the company asking for clarification but that didn’t come to my mind then. Usually, the investor relations department email is provided on the company’s website.
7. Question everything: A realist investor needs to be critical towards each & everything. Look things with suspicion. It helps to remove bias created by the positive statement in annual reports & other reports and most importantly makes you more convinced about your research.
Sometimes things are too good to be true, one should be extra vigilant there.
The most important part is able to judge management’s integrity. If that is not there, then the company is as good as junk. You can watch interviews on youtube, read about them.
Here are some examples:
If you are ready to take a risk with such companies, you don’t know when your investment becomes junk. Vakrangee is one such case. Within weeks it wiped off 80% of investor wealth. Its market capitalization has fallen from ₹50,000 cr to ₹11,000cr. Instead of making money you would be wiping off your wealth.
When I was analyzing the numbers for a company called Treehouse education a few years back, it seemed too good to be true. My thoughts were that if the company is growing by expanding on their own, it’s an asset-heavy business where you need to have space, building, setup, salaries etc, one cant have 30% profit margins while for others its less than 10 %. They mentioned they are growing via franchise. A franchise usually gets a small royalty payment/fee, that can result in 30-40% growth in revenue. That red flagged me not to invest. That’s simple logic.
There are numerous such example. One needs to weigh the impact & then take an informed decision.
9. Voracious reader: Most important part is to keep reading. Annual report is the best teacher followed by books, magazines, blogs etc
Youtube is a good tool to listen to investors & learn from them.
10. Persistence: Keep trying till you succeed & become a learning machine. I love the quote from the movie “The Founder”.