Sir I have been following your thoughts for quite a while and wanted your views on this theory as you are also a seasoned investor . I have entered the stock market barely three months back and have invested 80%-90% savings in equities (mostly large cap, I am in my mid 20’s ). Should I hold out for the next further months to bring normalcy to my savings or continue my current strategy of jumping in a stock ( after a lot of research and fair technical valuations only along with its sustainability in the long run). I am confused his experience does throw a caution light .
Invest only that much amount of money which you do not need for next 2-3 years.
Since you are very young (in mid 20s as you mentioned) you have a long innings of compounding ahead. Try to learn the ropes of investing, do real investing (upto comfort levels as a percentage of networth) and get a real feel of an investor. As you gain more knowledge and confidence and once that is reflected in your returns, increase allocation to equity.
If you are so inclined, try to learn small and mid cap investing too, because if you get the knack of it, there can be huge returns.
Read all Lynch books, zebra in a lion country by Ralph vanger, and other such books and try to digest and internalize the knowledge.
Sir would you mind sharing your biggest mistake and learning in your investing career
Some of the mistakes that I can think of, which cost me significantly in terms of losses and/or opportunity costs are -
- Invested in a Conglomerate/Holding company for only a sub/part of a business that I liked.
- Impatience when buying, buying right stocks but too early when I am aware I would get better opportunity later.
- Investing in a business for the liking of a single man/promoter, his/her aura or past history.
- Investing in risky sector with no clear exit strategy - Erosion of otherwise excellent CAGR.
- Not investing boldly/more in some of the high conviction stocks.
- I am not sure about this last one as I have never tried it so dont know how I would have fared, but feel should have given a try - Not having tried momentum, short/medium term trading strategy in bull markets. It is dificult for me to wear two Hats - of a momentum as well as coffee can investor. Would be great if some senior can guide how they wear this two Hats and achieve success as I feel for above average returns, this skill is most important to execute successfully.
Thanks for sharing, let me elaborate on my problem and exactly what I meant by wearing two Hats. Taking example of say the present crash in march, I had limited cash and limited brain bandwidth to either focus the resources on the sectors and stocks which can prove to be a part of my coffee can with time i.e. on lookout of such stories and buying them cheap/reasonable valuation/dips or focusing resources on sector tailwinds and catch the momentum for 6-12 months or so…I am unable to focus on both and divide resources be it the thought process or the spare cash…whatever extra time I have I end up studying on lookout for the next coffee can pick and whatever spare cash I have end up finally going to such picks only…end result is I tend to loose on momentum plays, which I would have otherwise enjoyed the ride, had not for this limitation of my psyche?
Would be great to know if anyone else also face such problem/limitation and want to overcome it and if they have already, then How? I am aware that most anwers I get is say divide portfolio into 90/10 or 80/20, divide the cash, satellite/core etc… I am aware of all that concept and strategy but problem is something stops me from practicing it, I am unable to make myself look beyond the coffee can approach, even if I want to…Thanks
My biggest mistake was cloning Here is the saga…
It all started in 2011 when I first attended prof Bakshi’s legendary lecture “Vantage point”. Prof Bakshi dressed in his black polo t shirt and blue jeans was presenting using his apple mac, the gadget freak that he is. There was an air of flamboyancy in his pedagogy unlike other professors as he introduced wall street anecdotes & his lectures were punctuated with good dose of buffett/mungers concepts applied practically to his own investment. This is what made him remarkable & this also added thrill to the otherwise boring subject. And the fact that he drove to campus in his Land rover was an additional trivia that added to his glamor. Although I only came to know about all of this in his second lecture after which I started recording all his lectures.
Through out his lectures and case studies my mind went back to the 90s since most of his case studies were brands originated in the 90s or older. All his class case studies were his own investment. Most of them were hidden gems unexplored & undiscovered, early on their trajectory to glory… Like Hawkins, Piramal, VST, Nesco, IGL, Nestle, P&G, Colgate, Bajaj holdings, Lumax & Crompton Greaves
Myself and other fellow students were so mesmerized by his lectures & personality that it gave a serotonin kick. He even wanted to invite Ajay Piramal to the class which eventually could not fructify, nevertheless to compensate he spoke around 2 hours on how to value Piramal enterprise in the class. He declared that after selling to abbott Piramal is sitting on a lot of cash & market is discounting it because there is no guidance yet on what he will do of that surplus cash. So the stock is beaten down to 350-400 range & he announced in the class that anybody who buys it now can be phenomenally rich in next 3-5 years. Next day onwards I started accumulating with a lot of excitement.
On one ocassion he ordered pizza for the entire class of around 50-60 ppl…just so that we stick around and listen to him, he is a very passionate teacher that way so the whole class was like
speechless with this gesture… Or who knows may be he made a kill that day on one of his stocks like he did in his first one GESCO.
Even during the class breaks, at tea & samosa, we discussed his path breaking style of teaching buffett & munger, that was brand new…everybody was like wow what a lecture what a great stock… wonderful case study… I suddenly started feeling that I am a Yale or Columbia scholar.
Most of my time after class was spent in mdi library reading financial journals to research about his theories, portfolio management etc… After doing that, in my mind I started thinking myself to be nothing less than Warren Buffett.
I bought all books recommended by him and read them for the heck of it, but never read between the lines.
Then I started reading all about Professor on his sites and blogs in the night, sometimes till 3 am…to understand his experiment with special situations… Zodiac, britannia bonds etc… I got addicted.
By 2015, my stock portfolio inspired by Prof Bakshi started to grow. I got excited… but alas with minor profits I gradually sold everything…in 2015 itself
By 2017 all of those stocks went dizzying heights…Piramal touched 3000… I was very frustrated because I had sold off all those gems… by now Professor Bakshi became a sort of greek god in my mind. (he was really a marketing genius to occupy mindspace of his audience like that)
So with anticipation of Modi win for second term and FOMO, I again started tracking & cloning his Value quest Moat fund. And I got to know about his new picks and read about them online I saw his buying pattern and also invested small quantities. I contacted his students on facebook and arranged for the lecture recordings of his latest finds Narayana Hrudalya, CCL, TVS srichakra, accelya kale. I thought I hit the jackpot because those lectures were not available outside of his class.
I also saw his recommendation and good words about EquityMaster. So I explored EM also and started reading it. My new portfolio was a mix of value quest moat fund and Equity master recommendations bought at all time high of 2017
Professor Bakshi gradually exited most of his ideas… TVS srichakra, Kitex, Narayana Hrudalaya accelya & others with losses… . but I could not exit… so I stayed invested in some of them… In march 2020 during corona pandemic my new portfolio was down - 46% but it has now recovered back to -12%…you can read about it here…IcyHot's portfolio-Down 46%- Corona Impact
Its a shame it took 8 years to understand my investment stupidities (cloning) . But I guess that was my tuition fees and hopefully my last mistake. Sometimes I feel that instead of cloning him had I selected only large IT stocks by eenie meeni moo (akkad bakkad) in 2017 I would have fared so much better.
For a superinvestor, 5 cr could just be a token investment out of his total 150 cr AUM asset base & he can anytime exit without warning you, which you will come to know only at the quarter end that too if it was 1% of total shareholding of the co. But in isolation, 5 cr sounds like a hell lot of money…and you get carried away by authority bias and its a BLIND SPOT, I got so thoroughly convinced by his lectures that I could not see this blindspot while tailgating and anchoring myself to such investments…
Although I still follow his writings and his library of 1200+ books recommemded on good reads. But I no more give a damn to what he is doing and where he is investing now.
I have promised myself that when I start my third portfolio, I will only pick the stocks as per portfolio management theory and investing only where I have deep conviction myself devoid of any external noises. I will only restrict myself to Indian IT story, which is the only place where management has historically been ethical.
By the way Tvs srichakra has risen around 20% in last 2 days… and I am happy with the outcome.
Thanks for sharing your story in details. Above statement again looks risky to me. No doubt IT has best talent of India at moment but any sector would have inherent risks. I see least business risk in India in quality FMCG but they still have valuation risk. Being IT heavy maybe fine but not sure about buying only IT?
I had the opposite problem of running into momentum stocks and sectors when I started investing. The company would give good performance and stock would rise sharply. The short term gain would dissappear quickly when the company could not sustain its growth.
To overcome this I started to invest in sectors with permanent tailwind like Consumer staples, Information technology, Capital markets, Consumer durables etc and avoid Cyclicals completely.
For momentum play, instead of going after the hot stock, I would wait for a company in my portfolio to gain momentum. Then increase its allocation in the portfolio.
The narrative in this thread seems to be - I screwed up in the past for so and so reasons, now I am wiser. Good in a way but has the potential to mislead.
Reason - There are so many mistakes that one can make, it will take a few lifetimes to make all of them! Investors (unless one is really good) tend to hop from one mistake to another, rarely does it so happen that people make all their mistakes in 5 years and there on become good investors.
The best fund managers continue to make mistakes even after two decades of managing money, what special skills does the average investor have when it comes to avoiding mistakes? Mistakes will always be made, no doubt about that.
Instead redefine the objectives -
How can we minimize the impact of mistakes that we will end up making?
How do we ensure that our mistakes do not set us back by too much?
How do we ensure that we always live to fight another day?
Now we are thinking about portfolio construct, risk management, limits, position sizing and how to build up/down allocation to any stock.
The biggest critique I would make (If I had to make one) about most people on this forum is our inability to think as portfolio managers. We think stock picking is all there is to investing.
Stock picking and portfolio management are different skills, eventual outcomes at the portfolio level depend as much on the latter as they do on the former.
We need to build those skills too. Excessive focus on discovering the next good stock won’t help us when the next market correction hits. Focus on surviving crisis is as important as the focus on generating alpha. If you are down 4 wickets for 50 runs while chasing 275 in a knock out game, irrespective of how well the team bats from there the fate is more or less sealed 90% of the time.
When I started, in 2010, I ran into the same problems too.
Getting over authority bias is a tough psychological problem to solve.
Nevertheless, here’s how I got over it.
If I was to ever clone anybody again, (unlikely because I have my own system now, but because good ideas can come from anywhere and the very next one could come from cloning too) here’s what I would do, in order to get over the lollapalooza of authority bias + halo effect + availability bias and what not.
Here are some of my thoughts on this topic.
Always start with a small position. I would gradually average up over a few quarters of good performance. The idea being, numbers don’t lie. So if I have a solid story, in the form of a thesis/recommendation/SHP data from a senior investor, then I’d wait for the numbers to back up that story. By doing this I may lose on the initial gains, but my capital is protected if that investor’s thesis doesn’t play out as expected. And the best of them get it wrong at times. And it’s okay for them to make these mistakes because failure and experimentation are inseparable twins.
As Howard Marks recently said, you may have to be an expert in a field in order to figure out who the true experts are. And Prof. had said in one of his podcasts - No role model is perfect, so have multiple role models. Hence, try to inculcate ideas from a lot of great investors, that resonate with you, into your own investment style so you can build your own distinct style. Build your moat.
Question everything. Pay attention to disconfirming evidence. What are the 3 things that could kill the idea you are considering? Try to validate the thesis using data. Data! Data! Data! I can’t make bricks without clay
Cut losses quickly. If the investment idea turns out to be wrong, my process needs to be such, that I can ruthlessly cut down my losers, rapidly, instead of slowly, because the difference between slow and fast could turn out to be night and day. One way I do this is by setting automated alerts, for cutting losses at pre-determined levels. This process removes a lot of bias and helps me avoid inaction, right when I need it the most.
Consider the senior investor’s position size. It may be a small experimental bet for him after all. I may need to size my position accordingly too, depending upon how much unbiased work I have done on the company. Even if you don’t initially agree with his/her thesis, take a small position where heads I win, tails I don’t lose much. Maybe I will agree with the thesis few months down the line, after seeing some data that disconfirms my ideas.
Eventually, I evolved a process which helps me find winners before other smart investors do. That should be every cloner’s end goal, than blind cloning. One needs to copy the senior investor’s thought process rather than his portfolio. The latter is short term compared to the former which is more long lasting.
Cloning is a very powerful concept. If you are able to reverse engineer what another great mind has done in investing, and understand why they were doing it and why they made these investments, those decisions will tend to be better than something you just come up with on your own." Mohnish Pabrai
My returns from the same stock could differ due to a lack of conviction / different holding periods. This was demonstrated by prof. in one of his interviews.
Occassionally, the senior investor’s firm may have a team of analysts. So we don’t really know whose idea it really is.
Beware of impact costs (for eg, he sells at 100 and you end up selling at 80, the impact cost is 20 bucks / 20% more). If a big guy exits the position before you do, the impact cost to your portfolio could be substantial.
That’s good points, would be great if you can share the process you mention above?
@Investor_No_1 The process is to look at a lot of quarterly results and choose from the best. The key idea being - the person who turns over the most rocks wins the game.
I have set up a lot of automated email alerts on screener.in to identity the next set of winners in the market. For example, laurus labs first showed up on one of my screens in Nov 2019. I didn’t look at it then but I did start looking at it in around April/May 2020 and what a winner it turned out to be.
Note: Split adjusted price for Nov 2019 works out to 70 bucks resulting in a 4+ bagger.
What has worked for me is to look at a lot of companies simultaneously, thereby maximizing the chances of finding the next big winner in the market.
My investment journey started after demonetization and next 1.5 years made good gains. These gains lulled me. Then came huge investment in Yes Bank where capital is locked and mostly will cause major losses. Few mistakes I made/learned are
- By following valuepickr, I felt money can be made by identifying next multi bagger and missed the point that by sticking to large caps also returns will be satisfactory.
- Learn to handle relationship managers of brokerage houses/banks. Even though some are good but when they change it will directly impact us.
- Learn to fix max amount per stock, Stop Loss and max loss. This will help in not over investing in a single stock and allows quickly cutting our losses. Just this simple point would have helped me from yes bank losses.
- Once some setup is making money except risk management its better to not change the system much.
- Stay away from news. most of the news are advertisements or a way to manipulate. Latest fad is international investing. No one mentions about Estate Tax that needs to be paid in case of death by legal heirs. returns etc will be much based on currency fluctuations etc.
Love your third point. Im following this from my experience in investing
I entered the market in August 2018, we were in Bear Market till Elections.
I’ve made plenty of mistakes, many out of ignorance and some out of emotional frenzy. A major lesson from markets is that if you’re living a good/happy/woke life, the odds of you messing up psychologically reduces drastically which is the key to sustained wealth.
In my first year, I was dabbling with stocks and would swing trade and was largely clueless about the broader market activity. I would use Money Control to go through stocks, read some news, make my picks and the rest was jai mata di.
Soon, my portfolio had many bagholders usually the cheap PSU stocks and other cheap stocks like Jain Irrigation, South Indian Bank. etc.
I dumped most of them during 2019 post election rally, but felt left out of the bull run that lay ahead.
I learned to ignore Financial Television and stock forecasters soon.
Upon checking my P&L calculation I realized that I was losing more money than i was making and learned about DP charges.
Then COVID19 came and wiped out my portfolio, 25% down. Now what? I started using reddit investment forums like r/IndiaInvestments and r/IndianStreetBets. It helped me learn quite a bit about markets and business. Still there were so many gaps in my knowledge and I learned each of them by putting my skin in the game.
Post COVID19 the stocks the cheap, but Gay bears in Reddit created an atmosphere of panic and started throwing predictions of NIFTY 6000 and like any supposed clever investor I waited, waited, waited… and NIFTY went to 10k.
I started buying here and there, though was afraid to commit too much of my capital. My Portfolio was a zoo with 30+ stocks.
I started selling them the moment I started seeing greener days. It was a huge mistake. I would make profits of 200-300 bucks missing out on 1000-1500 buck profit had I held them a month longer.
I learned that it was called Disposition Fallacy. Never sell your winners, not too soon.
And then I joined ValuePickr. I love the atmosphere here, but I must caution newbies you could get waylaid even here too if you’re not value conscious.
If you don’t know why you are holding a stock, if you don’t have a story, build it first. Don’t watch too much news or don’t read too much on ValuePickr. There are many threads where even for supposedly good companies we have posters who have created heavily skeptical environment by overemphasizing negatives of certain companies that the reader’s conviction could break.
I once held such a Stock, but was not quite sure of its value. The FUD created by ValuePickr threads did not give me peace of sleep at night and I sold that stock for meagre profits. Soon that stock would rally about 60%. It was Caplin Labs.
So as y’all can see I’m light years from being perfect but really perfection isn’t about what you do its mostly what you don’t do. Hold on to your picks rather than trading them away. Know the worth of what you’re holding, don’t be swayed by detractors and news (exceptions exist).
Edit : I forgot to mention about my MF Portolio. In my first year, I had diversified across 7 MFs, 4 equity funds and 3 debt funds. Now I just hold 1 index Fund. its funny how financial analysts fool the gullible to diversify even in MF. MFs are already diversified, don’t diworsify by buying too many plans.
Wonderful point you made there, value pickr is very dense and meaningful forum, but again the reader has to be cautius of overemphasis on negatives or positives and not get swayed by either…
I read about Thomas Cook India, wonderful commentary there both negatives & positives, but one influencer posted about how Mahindra resorts is a much better business model and how makemytrip/yatra can eat into TCIL profits. It gave me sleepless nights too as the stock went down to 30s level in April and was stuck there for a long time, but then I held on to my guts.
My friend went to Jim Corbett park in Nov and he reported the entire premium resort (7-8k per night) was fully booked and it was impossible to get a reservation as most other resorts were full too… So I kind of did a common sense analysis that its an early post lockdown frenzy & it should continue through out the year…and there is no way its gonna stop after vaccines…so I doubled up on the stock…
So far so good Thomas cook rose 100% from the levels of 26 to 50s… although still i am scared and i am in no way underestimating the threat from MMT/ online players… but holding on to it… as I have already seen the worse… it cannot get worse than it
Same for SP apparels, it went down to 50 in March and influencers on the thread were over emphasizing on threats from China, Bangladesh & Vietnam… and at one time I started thinking of it as a value trap and was looking to exit it. But I did the opposite, doubled up on it, it turned out to be a truly spectacular multibagger with 183% gain, jumping back from 50 to 178… I guess the underlying business got a fillip by being included in the PLI scheme of atmanirbhar Bharat
Thanks for sharing your experience. Really admire your conviction in holding on your bets.
My loss aversion was/is too strong, which made me chicken out of certain multibaggers. For one that 25% that I saw in March has made me paranoid of All Time Highs.
Let me ask you, how often do you check your portfolio? I do it daily. I find that sometimes even when everything is going well, I’m tempted to sell my winner partly out of loss aversion and partly to give myself the feeling that I did something (confession). I observed today that the temptation to do something is more when I’m hungry, once I ate something I let my portfolio alone. Lol it’s crazy.
What are mistakes?
Mistakes have a very opaque definition in the short-run; its relevance is mostly understood in the long-term. Biggest fallacy among humans is misconception about timing of realization of mistakes. The time of committing and acknowledging a mistake could be very different. Some mistakes are acknowledged immediately after committing it, while others can take years to realize. This learning not only holds true in stock markets but also life in general. The key to acknowledge mistakes is to measure whether our actions are producing desired outcomes or not. Therefore, mistakes cease to exist unless there are outcomes.
Mistakes in stock market?
Everyone enters stock markets to make profits, so profits can be deemed as desired outcome. If you purchase a script and its price goes up thereafter, your decision seems to be correct, however, if in coming days, price drops below acquisition cost, your buying decision appears to be a mistake. Such erratic price patterns always pursue one to do self introspection, taking him into an unwanted overthinking state to understand missing elements in the investment decision.
On the contrary, you get the same kind of feeling of committing a mistake, if price zooms after exiting from the script. Therefore, these 2 mental states - 1) Satisfaction (script prices moving in your expected direction and 2.) Mistake (script prices moving in opposite direction to your expected course) - are something investors have to live with throughout their investment journey. Important to note, irrational price behavior can last more than ones imagination, so realization of mistake can also take a little longer (so as feeling of satisfaction) than usual. Scripts not only undergo change in prices but also quality in the long-run. Therefore, one also needs to keep a tab on varying quality of his or her portfolio companies to minimize mistakes.
How to minimize mistakes in stock market?
Minimizing mistakes is the most crucial aspect of investing. To minimize mistakes, we need to identify them early. Against, innate desire to identify multibaggers early, if we identify mistakes first then the forthcoming results could be more satisfactory than those achieved from efforts in locating multibaggers. Mistakes can be identified early if an investor is able to understand his psychology early on i.e. how he reacts to the price movements. Next, he needs to understand the psychology of markets i.e. what is rewarded in the market (and what is not) in the long term.
Finally, he needs to devise an investment strategy, listing down the rules as to what-, how much- and when- to buy/sell. Such rules will help him to overcome his emotions and also not to overreact to Mr. market emotions.
Needless to say, even if the above steps are noted, most difficult aspect is to implement them consistently over the long-term. The key impediment to its smooth running is emergence of opportunistic genes which prevent one from remaining satisfied with his small but durable results and motivate to sneak out for more returns. It is quite natural that there will be intermediate trading rallies on the risky end (high valuation and second-quality or high valuation and first-quality scripts) of the market which will lure you to high risk opportunities. Therefore, how much we can disconnect ourself from markets is something that will help to minimize our mistakes and maximize output.
Stock markets are most difficult way to make easy money. Good luck.
In the documentary “Pumping Iron” Arnold says – Every bodybuilder does the workout everyday thinking to win the Mr. Universe competition someday. So, the destination is fixed and clear. The only thing left with us is, minimize the time to achieve your goal with your preparation.
Here are the mistakes/learnings from my side
- Trading mindset – In the initial first year of investing which is 2018, I was almost investing just based on price movements – For continued success in trading, you need technical analysis skills of highest calibre. So, I stay away till I learn it
- Foundation – When we buy some fridge or TV, we spend some time what are its best features, how many years warranty, value additions etc. Many investors have told to write down at least 1 to 2 pages on your investing rationale per stock. I was not doing this till beginning of 2019.
- Market Cap – Horses for courses. In general, large caps give stability to the portfolio but also gives less return. Mid-caps are volatile but can give better returns
Small caps are highly volatile but given a larger timeframe, they will beat the returns compared to large and mid-caps. I was having around 50% in small caps at one point of time. Given my understanding and assessment of stocks, it was akin to shooting in the dark
- Time horizon – The general consensus is to give 3 years if you are investing in large caps, 5 years for mid-caps, 7 years for small-caps. We need to give time for the investments to grow just like your FD, real estate etc.
- Cyclicals – There are some stocks which will click for once or twice in every 8 to 10 years. Investing in these, need extra caution as you need to study the underlying fundamentals on this extra-ordinary cycle/sales/profits
I have 3% of my PF in cyclicals now. At one point of time, it was 15% and I played the cycle wrong.
- Tracking the performance – We don’t need to track the portfolio performance everyday but need assessment of the performance in regular intervals. Tracking against index/ETF like BSE Sensex 30 or HDFC Sensex ETF can be one way . I am doing this from 2020
- Risk management – Setting thresholds for allocation can be very helpful. This is like mindfulness about what is in our control and limiting the downside
- Diversification – I contemplated on buying Sovereign Gold Bonds in 2018 considering the fact that gold price was on downward trajectory from 2015 and SGB is offering 2% fixed return per year and giving the current gold rate without physically holding it. I did not buy.
- Temporary vs Permanent – In the March crash, I sold some part of solid companies like HDFC, HDFC Bank, TCS, Page Industries. Ideally, I should have used this opportunity to accumulate them more. In an ideal scenario, I should have sold some debt portion and increased allocation to equity. As I was left with little dry powder, I had to sell some portion of existing portfolio. I was lucky I found some good bets like Laurus Labs and Sterlite technologies to compensate. So, the lesson here is – get your allocation balance right.
- Karma – Even though your analysis is right, sector is doing good, have great ROCE, ROE etc, have valuation comfort, some black swan events occur where you don’t have any control – 2000,2008 and 2020. Diversification into contra bets like gold will help mitigate this risk.
Accept your mistakes and move on. In the end, a happy and positive mind is the primary necessity to stay in business.
Disclaimer - I’m still at an early stage with respect to stock market. My portfolio link - Southern_Cross's Portfolio
Some more - Southern_Cross's Portfolio
The repercussion of these stock market mistakes (and some other mistakes in personal life) were so profound and overwhelming that I wanted to own a great collection of mistakes so that I have a mental model of what not to do.
So in the lockdown I started to write a blog on the same theme where I not only write my own mistakes but other’s mistakes as well. If you find it useful you are welcome to contribute as well https://pointblankwisdom.com/category/mistakes/