What not to do while investing

When you go to the gym for the first day you do not spend hours lifting heavy weights. Even if you want to build a body by lifting heavy weights it will not happen on the first day.

What not to do while investing

There is a process that you need to follow to gradually get into weightlifting. In case you do not follow the process, chances are that you will be in pain more than you gain.

You need to avoid certain mistakes when you start your stock investing.

Small cap investing

A lot of people think they are riding on the next Page Industries or Asian Paints while investing in small companies.

They do not realise that the chances of them finding great companies are pretty low. Only a handful of companies move from small cap to mid-cap and even fewer will move from mid-cap to large cap.

It's different this time 

Most of the booms and busts are very similar in design. The underlying reason could be different but patterns replicate the past. You have to be a student of market history to understand the market’s future.

Do not confuse product usage as an investment case

Never assume your personal experience with overall market experience. It may or may not turn out true.

Selling when the market is going down

Never associate a fall in the price of your company as any indication of bad investment. Often a general market downturn can make the price of the company fall. Interestingly it is a good idea to allocate more capital to your evaluated companies when they are going down.

Timing the market

A lot of people use systematic investment plans of mutual funds to allocate in the markets. It is one of the smartest ways to allocate your capital and avoids timing the market.

No strategy consistently tells you when to be in the market and when to be out of the market and those who tell you probably they are trying to sell you something.

Ignoring the price

In the market, this is called BAAP investing which is Buy At Any Price investing. It is never a good idea to not consider the price that you are paying for your investment.

Even the best of businesses require you to ensure the entry price provides a certain margin of safety. If the quality of business is low you would need a bigger margin of safety

EPS focus

A lot of trading mindset people focus on quarterly earnings. They invest or sell at the time of results.

There is no harm in checking quarterly results to ensure that your thesis is going right but there is a problem if you continue to act on quarterly results. Management has a lot of leeway to show numbers based on their financial assumptions.

If you avoid these mistakes you will be better off in comparison with other investors in the market. You must train yourself to enjoy the process of investing rather than the outcome.

The idea of investing is return, but the investment journey is all about reflection and learning.  

Doubt avoidance can lead to committing errors.

Susan Cain in her famous book “Quiet: The Power of Introverts in a World That Can't Stop Talking” explains that introverts are great thinkers and arrive at their assessment slowly.

Doubt avoidance can lead to committing errors.

Interestingly a lot of scientists and deep thinkers are part of this ‘introvert’ group. They arrive at their decisions slowly.

A lot of deep thinking is a gradual process, but most people are not trained to think deeply and rationally.

Ancient humans were trained to react instinctively because there was an upside to that reaction.

Imagine they heard a noise from the bushes in a thick forest, the most logical approach was to just run, that’s exactly what ancient humans did. This reaction helped them save their lives. The problem is that we tend to act in the same way even though we are not in the forest.  

We want to act so that we don’t reflect and think more about the issue at hand. It’s just easy.

We tend to avoid any doubt by acting fast but lose on the quality of our decisions. Daniel Kahneman explains this as system 1 versus system 2 thinking.

We are trained to work with system 1 of our mind to arrive at decisions.

These days a lot of people have FOMO for real estate. The pricing of real estate projects is at a bizarre level. System 1 says ‘You are losing out, if you don’t act now’. This makes us arrive at a buying decision quickly without thinking too much.

If you force yourself on system 2 i.e. if the price has increased by 100% in the last 3 years and if real estate apartment growth is maximum capped at the inflation in the economy, say 6-7% p.a., isn’t the current price already reflecting future growth?

Maybe in the next 5-6 years, the capital growth may be flat as a best-case scenario. The worst case would be a decline from the current price.  

One sign of a leader is quick decision-making. Process-oriented decision-making is often quick.

In 2008, Warren Buffet gave a cheque to Goldman Sachs for $10 billion. The decision was quick, but he had studied the company and management for years and he structured the deal in his favour.

This deal is claimed as one of the finest investment decisions in the world. “Fixed interest rate and later an option to convert preferred equity into common equity.”

As far as the process is defined and then refined regularly, arriving at a quick decision is easy. The quality of decisions will also remain high.

The trick is to be aware of which system you are operating. System 1 or System 2.

Once the decision is made, any new information should be incorporated. This means you should constantly be sceptical about where you stand today given the new set of information.

“When the facts change, I change my mind. What do you do, sir?” - John Maynard Keynes

Disliking something can be dangerous too.

A certain level of liking can impair your judgement, similarly, a certain level of disliking can have equal harm.  

Disliking can impair your judgement too

Pandemic

During the pandemic time, a lot of people dumped travel-related stocks i.e. airlines, railways, hotels etc.

Here is a snapshot of returns over the last three years (18th March 2024). I have ignored the 2020-year performance, the price in March 2020 was extremely depressed and will show a very high return.

IRCTC - 3 Years share price return 35% p.a.

INDIGO - 3 Years share price return 24% p.a.

INDIAN HOTELS - 3 Years share price return 72% p.a.

Just because someone disliked a sector, he/she would have ignored a basic assumption, human beings will survive, and things will go back to normal.  

No Common background

Imagine you get a message to connect over LinkedIn. Assuming the invite is from someone who does not have anything in common with you, the probability of establishing the connection is quite low especially if the labels don’t ring a bell. There is a general dislike for that person.

You may not even look at the invite if it comes from someone who is not from your city and whose educational background does not match yours.

Boring industries are disliked.

There are so many companies in rather boring industries. The share price of those companies even during a bull run is reasonable. One of the reasons is that people in general don’t like them. In the short-term, prices don’t move that much but in the long-term share price catches up with the fundamental performance.

You increase your chances of investment success by just associating yourself with boring things/industries. People in general don’t like boring industries and that will ensure you get a reasonable purchase price.

Expert opinions

A lot of finance experts come on TV channels to share their opinions (shown as facts). Better language skills and charisma can add to your liking for the finance expert, and you can indirectly develop a liking towards the opinion of the finance expert.

It is a different matter that often these finance experts have their agendas to be on TV. Maybe their suggestion of an investment product is driven by the wrong incentives by the product manufacturer.

Similarly, if the finance expert expresses a negative view of a stock, it can influence your judgment negatively. 

Fair decision-making should be based on unbiased analysis given the available data. As the data changes or new information becomes available, you should continue to refine your initial analysis.