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10 Demons We Must Fight in the Investing World (Happy Dussehra!)


Dussehra is about the victory of good over evil. Not necessarily is the winner always good, or the loser always bad, as indeed there are temples that worship Ravan as well. Every person has flaws, and there’s a bunch of demons inside of us that we fight. Dussehra is about 10 – the 10th day of victory over a Ravan who had 10 heads, etc. So we’ll stick with that theme.

Here are the 10 of our own demons we must regularly fight in the investing world. We’ll keep it short.
1) Complacency. “There’s too much money on the sidelines for the market to fall”. That’s a statement that should trigger a warning bell. “Housing prices won’t fall because they haven’t in 15 years”. Yes, but they have done serious damage 20 years ago. Don’t tell me this time is different. It’s never different. The biggest loser is someone who’s complacent, whether it’s an Indian cricket team cruising along while chasing a score, or an investor betting on home finance companies because, well, housing prices don’t fall.
2) Panicking on too much news. Whether it’s panic buying or selling, really strange things happen to stock markets because of news. One company announces a board meeting to discuss a buyback, and it’s up 10%. A rumour comes in that the government will reintroduce petrol subsidies, and oil majors fall 10%. This is the market everywhere, and it’s like a little kid who’s had too much sugar. You’ll know if you’ve had kids. Otherwise, just think of Donald Trump.
3) Ignoring the skeptic in us. Something in you tells you that if HFCL hits upper circuits every day, there’s something wrong. HFCL last went up in the previous crisis in 2008, and you know it’s an operated stock, but you assume again that this time is different. When you ignore your own skepticism, it impairs your ability to invest well. Buying shady stocks is a different strategy – when you know it’s shady. But to ignore the skeptic inside is to make friends with the demon that makes you lose money.
4) Confusing economy, politics, and markets. There’s a problem with the economy. It’s hurting big time. GST has an impact that might last a while. Exports are in bad shape, banks are hurting with NPAs, and the government machinery isn’t exactly smooth. The politics get worse; they blame each other, they make strange policies like “all-time power to everyone” without specifying a real strategy. Markets, though, do their own thing. Getting confused between the three is another of those evils that reside inside us. There will always be good stocks to buy, in whatever kind of market, and they will not be swayed by general economy moods or by politics. Case in point: We highlighted HEG on Sep 1, and by Sep 29 it’s been up 30%, despite broad markets falling.
Note: Sun TV is a political gamble. It remains one stock that is irrevocably married to whether the people in power love or hate their founders.
5) Arrogance about a “pick”. Everyone loves their stocks. But even great stocks can do lousy things. If you get too caught up in pride, you will not look at the negatives of each stock. You might really like a stock like Kitex or Religare or Inox Wind, which then has inexplicable moves to new lows. At that point, there is no harm in saying one’s analysis was off and rethinking. But if you remain arrogant, you will fight the move down. The market is wrong!
A strong wind breaks the branches that resist it, but those that sway with the wind live to fight another day.
Note: Staying on might still work. A Satyam rebounded, eventually. But the likes of JP Associates (-90%) and Unitech (-95%) seem to have many more in there. Oh, and we’re guilty too at Capitalmind, as in Sun Pharma.
6) Blindly following others. From the likes of star-fund-manager Porinju Veliyath to a brilliant S.P. Tulsian, there are excellent stock pickers out there. But following them blindly is silly. They have their own reasons to buy – and then to sell. If you follow them, you have to be doing your own research, otherwise, all you will get is pain. Stay curious, but stay skeptical enough that you’ll research everything you get. No one is more responsible for your financial well-being more than you, with a potential second being someone who has fiduciary responsibility for your money. Even your banker doesn’t have a fiduciary responsibility – which is why he recommends lousy ULIPs – so why should you blindly trust in an “expert”? The keyword is “blind” – follow, but only after you’ve done your homework.
7) Making bets too small. Too many times, we feel happy that we’ve made 70% on a stock, but if we put just Rs. 10,000 in it in a 25 lakh rupee portfolio, it’s too little to make a difference. A typical portfolio of 30 stocks would have about 1.5% to 3% per stock. A concentrated portfolio would be about 10% to 15% per stock. At less than 1% it’s not going to be meaningful to a portfolio to have a position other than a “tracking” one.
8) Making bets too large. I often hear of the story that someone put all his money into one stock and that made him many crores. Unless you’re a promoter or can influence the stock’s growth (like many Buffett investments) you will end up in trouble if the stock tanks. Putting more than 20% of your portfolio in one stock is sub-optimal.
Some stocks become larger parts of your portfolio. Upto 1/5th (20%) is fine – you have to let winners run. But when they go beyond 20% you might want to take a step back and diversify the excess.
9) Ignoring the objective of a stock purchase. They say that long term investors are just short-term investors who couldn’t take a loss. The demon in us refused to believe that a stock, however low priced, fell to even lower levels. Or that a great company, bought for a short term punt, is simply not doing well but hey, it’s great, so let us keep it. What you should do is: Sell it, and try and buy it back again. If there’s something that stops you, it isn’t as great a company as you thought for a long-term hold.
10) Saying “It Can’t Be True”. Can a company trade for less than the cash in its bank? (Assume no debt) Or, can a bond trade at 12% even when its peers trade at 8%? Can people be crazy enough to assume TCS will move 8% on results day when it hardly ever does? Each of these opportunities makes money – sometimes easy money – for the investor. Yet, the first thing we say when we hear of them is: it can’t be true! If it was, then someone else would…have found them.The 100 rupee note that’s on the ground can’t exist, because if it did, someone would have picked it up.

There is a catch in too many of these stories.  But that doesn’t mean we stop becoming believers. The day we stop being inquisitive is the day we’ve stopped becoming good investors.

With that, we’ll let you ruminate about the demons that have attacked you recently. Quite a number have affected us at Capitalmind, including the need to write catchy headlines such as “10 Demons You Must Fight…”. But like all else, we’ll keep fighting, learning, and getting better.

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10 Demons We Must Fight in the Investing World (Happy Dussehra!)


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