Mindset of a successful investor

Stock market is a unique marketplace. Buyer & seller hold opposite views for a particular stock under the trade. Seller thinks it is a good time to sell while buyer thinks it is good to buy. Eventually, only one will be proven right. A successful investor will be one who is proven right more often than not. To be right on most occasions, it is simple (on papers) – buy low and sell high. In real world it is one of toughest skill to master. With more information available than ever before this skill is getting tougher and tougher because average smartness of investor is increasing. However, more information is also leading to another problem. Problem of plenty.

In this article, we are discussing various strategies which a successful investor should be using to develop their own strategy. These are not related to stock picks but more of a mental model which very equally important in making money from the stock market. We will be taking clues from successful investors in Indian market. We will not quoting Buffet etc. However, please don’t blindly copy anyone of them, not even this article. Treat this as a guidance and rest you will still need to figure out. If investor has hunger to be successful, they will find a path.

Strategy Evolution

Once you decide to buy direct stocks, all the onus to make money is tied to your actions. Taking right action and buying good stocks is the only way to go. To buy good stock, there are various approach: value, momentum, dividend, growth etc. Each of them has a merit and investor need to ace one of them and make it a strength.

Once you do so, next challenge is to decide which segment to focus on – Largecap OR Mid/Small caps OR Multicap. After segment has been decided, next step which is diversification. Investor needs to decide how many stock to own in a portfolio. No one has infinite money. As per statistical analysis, it has been proven that owning more than 18 stocks from different sectors is enough for the purpose of diversification. Any more stock will not increase diversification. Big portfolios or mutual funds may carry 50+ stocks but they do it in order to absorb huge investment corpus and any manage redemption pressure. So many stocks are surely not needed in a retail investor’s portfolio.

While choosing these 15 or 18 stocks, you need to be selective and look for only those stocks which meet your style. It is not easy. There are thousands of stocks listed on Indian exchange and you need to find just 15. Most investor falter here despite knowing the pitfalls of over-diversification. By investing in 30 or 50 stocks, investor is not going to get rich. In best case, it will give you mutual funds like result even after so much effort & sweating. It is not worth owning so many stocks as mutual funds can easily do it for you with minimal effort from your side.

Coming back, what is an investor’s style? In simple words, it is what suits you. This means playing to your strength. It can vary from investor to investor. For example, an IT engineer may be good in understanding software companies. A real estate agent will have good knowledge of the real estate sector. Same goes for an accountant or a whole-seller or a distributor. If you want to opt for a different industry other than from your own profession, it is perfectly fine. You can read a lot to understand about that industry. There are enough materials available on the internet. Someone like Radhakishan Damani like this style.

Another definition of style can be your own filters to identify a great company. Someone like Vijay Kedia looks for a bargain with respect to it’s peers from an industry which has massive room for expansion. Someone with this approach can look for, let’s say, telecom sector. Identify a company which caters to this sector in a meaningful way, it can be an optical fiber company or telecom equipment company or telecom operator itself. Don’t forget the bargain part, this stock should be available at a bargain price as well. Take a plunge once bargain is available else keep watching like an eagle till it happens.

Another style which is increasingly gaining popularity is coffee can approach. It is about investing in a proven business model with high return of capital and commanding a sizable market share. This approach is made famous by Saurabh Mukhejea and works well if entry is done at reasonable price. In a way it is an extension of GARP (growth at reasonable price).

Another style can be buying stocks which are totally out of favor at the moment but they are essential for the economy. Like Kenneth Andrade, an investor can prefer utility stocks operating in electricity or gas transmission. One can look at manufacturing or construction sectors which are needed for creating nation’s infrastructure. They can’t be created digitally hence don’t have a threat of being obsolete.

Discussion on style can go on & on. The point we are trying to convey is that investor needs to develop and define their own style. It makes no sense to copy someone’s style as your style will be unique. It may carry some resemblance with proven styles but investor must feel secure & confident in their own style otherwise market noise will make investor nervous and force an untimely exit or inaction when action is really required.

The underlying assumptions in all these styles, which are often underplayed, are as below.

  • Investment horizon should be long term. These strategies are best played with a horizon of three plus year as a bare minimum. Sometimes it may require more time as market may take time to recognize it.
  • Once a decision is made, stay put with your investment theory though ups and downs of the stock price. Keep validating your investment theory if it is no longer valid.
  • It can be extremely boring at times. Like an eagle, investor need to wait for the right opportunity. Have patience. Same is true after investment as well. You must wait for your investments to ripen. Cutting short this process midway, means you need to plant another seed all over again.

We hope this article, helps to invoke some thought process to become a better investor. It goes without saying, all of them requires time from your end. If an investor does not have enough time & resources, they must outsource it a portfolio manager. Stock market is nasty place to play with money.

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