El Dorado. That’s what a lot of new retail investors perceive the stock market to be. Guided by the success stories of the veteran investors like Rakesh Jhunjhunwala, and misguided by the stories of the riches the industry has to offer, many of them have fallen victims to this dreaded money chase. Like the unattainable El Dorado preyed on its chasers, stock market has scalped many retail investors to a point of no return. Many have ever since returned, to continue with the treasure hunt, and have returned with riches, but like all other hunts, one needs to be smart, daring, opportunistic, and above all, patient to win this game.
There are probably many “first rules” of investing, but the cardinal sin in investing is not protecting your capital. – Click To Tweet
There are probably many “first rules” of investing, but the cardinal sin in investing is not protecting your capital. How much ever risk neutral a person may be, one needs to check where and why your investment is moving. A timely introspection and review will always help in maintaining your risk profile, all the while protecting your capital. It’s not whether you can weather the storm, it’s whether you have to go through the hassle.
Every investment should be towards serving a target. It can be retirement, children’s wedding, education, or even buying an exotic pet. Whatever be it, one needs to be laser focussed in achieving this target. Short term pitfalls can be many, but learning and adapting from those would help reach the targets set for long term. Depending on the necessity of the set target, one can assimilate risk into it. For e.g., need for an exotic pet is not as high the education for one’s kid. Retirement and healthcare needs should have a better risk portfolio than one’s travel portfolio.
One important measure to gauge an investment is the risk. Every investment is risky, ranging from FD to Real estate. The probability of the risk materialising is what differentiates each investment. FD has a near no risk profile, but near no risk is not exactly no risk. However low it may be, there’s still a probability of default. Similarly, real estate is more lucrative on the returns front, but has a huge liquidity risk. Leveraged real estate investments also carry high interest rate risk. Every investment grade instrument carries risk, and as an investor one should know the intricacies of these risks.
Hindsight is 20/20. This is one of the most prevalent sentiment in retail investors. What if we had bought HEG at Rs. 200 and exited at Rs. 4000? What if we had bought Rain Ind at Rs. 100 and exited at Rs. 500? These are the thoughts that entice retail investors to partake in adventures such as catching a falling knife, like buying Yes Bank at Rs. 200 because of the lures of reversion to all time highs. More often than not, such daunting adventures kill their spirit and leave their financial position in doldrums. In future they’re unlikely to dabble in any investment other than FD’s. A major reason for this is because retail investors know very little about position sizing. Without position sizing, one is likelier to loose capital in the wild chase of alpha.
Ideally investors should segregate their capital into various tranches and invest accordingly. As alluded before, according to the needs for the future, risk needs to assessed. Retirement fund needs to be long term and risk averse.The capital needs to be deployed in a phased manner rather than a lump-sum investment. Invest a portion of your savings towards this fund. A similar idea applies to the fund for children’s education. Play it very safe with these. Apart from these basic needs, one can have a little risky portfolio where one invests lump-sum when opportunity arises, and sure it will happen. These funds can be withdrawn according to short term needs or when better opportunities appear.
A very prominent idea when it comes to investing is that one should invest only in instruments one knows about. Buy stocks of the companies only when one understands the business. This mitigates the risk from the wild goose chase. Avenues for investing open up when one starts observing the environment surrounding them. Consumption, healthcare, insurance are secular sectors where people are not going to cut down spending. Trend of consumption changes, but consumption never ceases for a country like India.
Moving on to position sizing. This mainly applies to lump-sum investments. Try to find 10-15 stocks in which one would want to invest. Make sure that these stocks are good enough to warrant a 100% allocation, but never invest more than 7-10% in one stock. This is to protect capital. At every point when you increase the capital, make sure that the proportion stays the same. The capital one wants to protect should not hold more than 7-10% of a single share. This helps even during price appreciation. The other option is to invest in a set number of stocks every month irrespective of the price. In the long run this will help in creating a good corpus and it wouldn’t impact one’s liquidity nor cashflow.
When a 60k product is on offer for 30k, that’s 30k spent, and not 30k saved on discount. – Click To Tweet
But the very first step in investing is to cut down on unnecessary spending. When a 60k product is on offer for 30k, that’s 30k spent, and not 30k saved on discount. Financial discipline goes a long way in investing. Investing is 90% discipline. This is not to say one has to penny pinch. One can indulge in their vices once in a while, and still carry on investing in a prudent manner. Every penny not spent is a penny saved, but the same should serve a purpose. There’s no point slaving your entire life and saving till retirement, when in all likelihood the retirement would be filled with resentment of the lost years than financial security. Everything in moderation is the key. Cater to needs, but not wants.
History is written by winners, but there’s nothing wrong in learning from the ones who didn’t make it. In fact, in investing it’d be better to know the lessons from the ones who didn’t make it. Avoiding those mistakes would help a lot in capital protection, which is paramount for retail investors. Learn, adapt and improve. We usually don’t stress much on skill, but skill is very important in building a corpus. Either one will have to up-skill in investing, or he’ll have to up-skill in his profession to invest more. Investing should be the extra gig one indulges in; it shouldn’t be an extra burden. Investing is simple when it’s kept that way, don’t make it a rigamarole. Let’s hope to win together.