With positive optimism in the equity markets, every investor wants to get rich and see returns growing on regular basis. This brings in all types of folks to this space. The first time new investors who having flirted invested in safe heavens of fixed income also wants to enjoy the fruits of higher equity returns. The beaten down investors, who have burnt their money while trading in the equities, again is lured into investing in stocks. As the equity indices grow, many investors look at it as a method to make easy money. But that is not the case. You could get lucky once and that one-time gain cannot be considered as a skill.
Equity investment requires hard work, is process oriented and requires skill. And also a bit of luck! Majority of us fail to acknowledge the role of providence. Having said that, you need to be prepared to use the luck in your favor”. Lets look at what not to do while investing
Ignoring asset allocation
As the returns of a particular asset class grow, we tend to move towards the asset class ignoring the investing framework, which can be suitable for an individual. You ignore the liquidity needs, effects of draw down and suitability of the asset class in the investment journey. Return becomes the only criteria and more often than not, one comes to grief. In majority of the cases it is because you enter at the tail end of the asset return journey, wherein the early stage investors are exiting. Getting the asset allocation and the investing framework is the key. You can have a two-way asset allocation strategy. Strategic asset allocation and tactical asset allocation in a 80:20 or 90:10 ratio based on your risk appetite.
Strategic asset allocation will follow the path of asset allocation as put in place based on your goals, time horizon and risk appetite. For any opportunities or timing, the tactical asset allocation will come in play. This will take care of the urge to chase returns or invest in trending asset class, without disturbing the core portfolio and the asset allocation. Care needs to be taken to ensure that the tactical asset allocation do not turn out to be a strategic asset allocation.
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As human beings, the recency bias, has a deep impact on the way we perceive and act. The asset class delivering the returns is the space where all the investors and traders want to be. Basically, chasing returns. In investing, both ‘n’( period of investing) and ‘r’ (rate of return) play key roles. But then emphasis is more on ‘r’and not on ‘n’. In fact, ‘n’is the factor of compounding and it is your key ally in the investing journey.
Another important trait is to have patience. But majority of the investors display a lack of patience. This is majorly displayed in the form of exiting early from an investment. If the identified stock has growth prospects and has a moat, the holding period could be ‘forever’. A classic case in point —would be Maruti Suzuki. Issued at Rs 125 a share and listed at Rs 165 in 2003, the share price today is over Rs 7,000 a share. There were many who took the listing gains of more than 30%, only to lose out on the compounding gains of today. If you find a good stock idea, nurture it and make it difficult to part. In the investing journey, it is important to have a process and it is important to know what not do.
The writer is managing partner, BellWether Advisors LLP.