2017 has been a great year for equities, BSE Sensex has given around 26% returns so far. Year was abuzz with lot of activities, investors had a fair share of happiness and heartburn. FIIs pumped in money earlier in the year then pulled out later around September. Domestic inflows remained strong and continues to be strong as a rock. Many investors must have made good profit during the year but are they satisfied? Not many, since there is always a neighbor or colleague who apparently made more money than you. As this year comes to an end, it is a good time to retrospect & ask yourself, what type of investor are you? The one who loves hitting boundaries like Yusuf Pathan or the one who runs hard like Virat Kohli. Many Indians love cricket and no better way to learn investment lessons other than cricket. No one was born as a successful investor they improved with time. In this article, we will share our thoughts on making of a successful investor using cricket as analogy. You can decide whether you invest like Yusuf or Virat.
Who does not love watching Yusuf bat and hit sixes. I admire his big six hitting abilities, especially slog sweep sixes. He makes cricket come alive at least until he is there in the middle. Coming back to the world of investment, let’s assume Mr X is a Yusuf style of investor who made lots of money by placing huge bets on best performing stocks. His funda of investment was to look at 52 weeks high chart and buy those stocks. There are high chances that they will fire more. Using this strategy, he kept on buying lot of high buzz stocks throughout the year. Such is the bull run that many of them gave great returns while some did not. Now Mr. X is clever enough to only talk about his high return stocks which give heartburn to colleagues. Obviously, he took a lot of risks in order to hit those sixes (high return) and due to bull market (Zimbabwe bowling), most of them went for six. Over long-term, such strategy is a sure shot recipe for disaster because bull market will not remain forever (there is an Australian bowling waiting for you), however you will remain in market because of addiction. In fact, there is a human tendency to invest even larger amounts of money, once you get habitual of easy money. With large bets comes large losses as well. So whatever you earned in a bull market is paid back when market sentiment changes. I personally know a person who made good money back in 2005 and bought himself a car. By investing thousands, he made lakhs. High on success, he invested lakhs which became thousands again in 2007. High Risk High Return? Not really, this is blind risk, blind return.
Virat Kohli is a consistent performer, takes lesser risk and fetches maximum runs (returns). He averages more than 50 in both tests & ODI as compared to Yusuf who average in 30s. Though Yusuf hits significantly more sixes than Virat but when it comes to longevity, it’s risk which differentiates between good and great. What is Virat’s secret to success apart from lesser risk? The answer lies in his ability to know his strengths and weaknesses, his ability to stay focused on process and take calculated risks. In investing parlance, it can be translated as solid investment process and ability to stay focused even when neighbor is hitting sixes at the other end. Most likely, you will be active in stock market for many years, so play it as a test cricket. Virat style of investors will need to stay fit by doing exercise so when big occasion comes, they are fit & sound enough to handle it. By running hard, Virat keeps on adding lots of runs year after year while Yusuf has few good years followed by bad years. Coming back to knowing your strengths & weaknesses, an investor must know if he can handle the risk which comes with equity investment and more so in small caps. I know at this point in time, many will argue that they are aggressive investors who can handle up & down associated with small caps. But having -50% in imagination is way different from having a -50% stock inside your demat account.
It is not necessary that you have to belong to either Virat or Yusuf, you can be somewhere in between if not purely Virat. Risk management is often a neglected topic in a bull run. Even if you had been a Yusuf style of investor, you can still leave that style and settle for more Virat like style to save yourself from future losses.
For Virat style of investor, you should be proud of your process and don’t have a heartburn if someone is hitting sixes in your neighborhood. For sure, law of average will catch up with so much risk involved. It’s only a matter of time. You can still run singles and doubles with a boundary to make almost same number runs in an over without risk!
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