Lessons from the investing trenches

Since I started investing in 2000, just before the dotcom bust, I have been following the long-term buy-and-hold method for investing. Over the last 23 years, a lot of my investing philosophy and style has changed. This change has been more because I keep observing what is working for me and what is not and I try to keep updating myself.

Let me try and document a few things that I have learned over the years.

1. Stocks are not forever

I was enamoured by Warren Buffett and naively believed everything that he said and was said about him. Over time I realised stocks are not forever, unless, of course, you inherit the business.

2. Be a fair-weather friend of a company

I am willing to partner with a company in its good times and happily part ways in its bad times. As a small investor, I think it is my right and privilege to do that. I can always buy back when the good times are back again.

3. Capital is sacrosanct. Don’t lose it.

Working hard and saving money to invest is not easy. A lot of delayed gratification and sacrifices need to be made along the way. Once capital is accumulated, you don’t want to lose a large part of it. No matter what. So I use stop losses. I know I don’t know everything about a company or an industry or what macro headwind might hit us tomorrow, so it is important to sell and protect my capital.

4. Have multiple strategies

I used to mainly invest in compounders. Over time I realised investing styles are also cyclical in nature. So, to be able to make money relatively consistently, you need to be able to adapt to different strategies. Being dogmatic about a particular style is good for sounding good but harmful for money-making.

Large-cap, mid-cap, small-cap, value, growth, dividend, quality etc. are all factors that work from time to time in the market. Your investment process needs to be flexible to use one or many factors.

5. Look for sustained momentum - both in business and price

The biggest money is made in a company which has business momentum. Think of HDFC Bank for its first 20 years, Bajaj Finance over the last decade, Astral, Asian Paints etc. These have been businesses with strong business momentum which resulted in strong and durable price momentum.

6. Price is the final adjudicator.

Whatever style of investing you follow and whatever is your time horizon, ultimately you will make money if you sell at a higher price than your buy price. If you invest in the greatest company in the world but the stock price does not move in ten years, it is a lousy investment.

7. Value is in the eye of the beholder

Valuation is a subjective exercise. It depends on the intrinsic value and the narrative value. The same stock can be valued by different investors at different levels even with the same input based on their own narratives.

Have a sense of valuation, don’t pay obscene value but also remember you good things are rarely cheap.

8. Get both fundamental and technical factors in your favour

Investing requires us to sift through lots of information to build conviction. Fundamentals tell us about the industry and company. Technicals tell us about the demand and supply in the market.

Saying one is a superior form of information to the other is simply foolish. It is all information. It is your job to be able to use it effectively.

9. Diversify across timeframes

If your inherent nature is to be a long-term investor, get help to capitalise on shorter-term opportunistic bets. If your natural inclination is to be a trader, do the same for your long-term investment portfolio.

I started doing quant-based systems and TechnoFunda mainly because I wanted to augment my long-term investing by capturing shorter-term trends. This has not only helped me have a much smoother return profile but also helped me tremendously in my coverage of stocks.

10. Psychology is the most important thing

The greatest determinant of investing returns is our own psychology. Oddly, I have found that the biggest challenge for most people is to “digest large gains”. Most people get very edgy when stocks start doing well. They want to sell and lock in their profits. Whereas when they are losing money they are okay to hold on because they hope that they will get their price back sometime.

The best investment as an investor is to work on one’s own psychology.

This article first appeared on moneycontrol.