In the image above, we have 2 famous runners. On the left is Eliud Kipchoge, who finished a marathon in 1:59:40 creating a world record in October 2019 and on the right is the fastest man alive, the sprinter Usain Bolt, who completed 100m in 9.58 seconds. Have a look at their physique - you will see a marked difference. Eliud would be aptly called as lean or lanky, while muscular would best describe Usain Bolt. While they are both into the sport of 'running', they are playing two very different games. They train differently, eat differently, prefer different sports gear to maximize performance in their respective games. If they were to play the other's game, they would falter and even lose performance in their own game.
This is true of any field. On a cricket pitch you play Test matches, One-Day Internationals, and Twenty20 matches. For each of these, the strategy is different, training is different, player mindset is different. There are some players in the team who are better suited for each of these games.
Yet, when in comes to the arena of investing, often investors have no idea what game they are playing. At the extremes, there is someone who is buying a stock with the expectation that it will go up over the next few minutes, and a passive investor who is buying the same stock to hold it indefinitely.
The first investor, let's call him Share Khan (given the penchant for using animal names in the world of investing) has no interest in the company, it's earnings, the competitive intensity in its industry etc. All he cares about is the price momentum, the volume of shares traded, moving averages of the price and other indicators formed on the basis of the price and volume trends. He has a stop-loss defined, where a sale transaction is automatically triggered if the stock price falls below a particular level. He likes to make at least 15-20 transactions on an average day. Share Khan aims to make a modest return on his trades, and is very happy to book a handsome profit when the stock price moves up significantly in the short run. He is 38 years old, and trades out of a broker's office - with this being his full time business. A part of the profits he makes is used to meet his monthly expenses, apart from other sources such as the rent from a property he owns. Share Khan likes to call himself a trader, and believes with utmost conviction that trading is the only approach to make money in the market.
Our second investor, let's call her Niveshika (Niveshak is the Hindi word for investor), is buying the stock to become a part owner in the business. She has studied the company, its management, the industry it is in and its growth potential, and the behavior of the competition. She has interacted with the distributors of the company's products, quizzed the management in quarterly conference calls and knows quite a bit about the company's product lines, its growth and capex plans and the key risks faced by the business. She can recite metrics such as ROE, ROCE, Operating Margin, Asset Turnover, Debt to Equity etc. even in the middle of the night, when asked. Niveshika believes in the earnings growth potential of the company over the long run, and she doesn't care about the daily stock price movements of the company. She buys or sells 1-2 companies a year, and studies about 20 companies. Niveshika is 43 years old, and is a procurement manager at an MNC, which is her full time job. She has an interest in investing and believes it will help make her financially independent. Hence, she spends quite a bit of her personal time doing this research to invest. She doesn't understand any of the price and volume metrics and chart patterns and believes them to be silly voodoo which almost always make you lose money. She believes 'growth investing' is the only way to invest in the market.
To add to the complexity, there are a number of other players playing their own games (knowingly or unknowingly):
The institutional investor - e.g., mutual fund, looking to beat the benchmark, who is a growing force in the market, but is constrained by client inflows and redemptions
The retail investor, who has recently started buying stocks looking at the incredible returns his peers have made over last 12 months, and expects the same for himself
The passive index fund, which passively invests in all the stocks which form a part of a particular index irrespective of the price-volume action or the business fundamentals of the underlying stocks, as long as they are a part of the index
The leveraged hedge fund, which has both long and short positions on stocks, investing 5 times its own capital with borrowed money
The F&O traders, who make 'Long Straddles', 'Protective Collars' and 'Butterfly Spreads' with their options strategies
And the list is endless, but you get the point. Each of these players, has a different context, different mindset, different level of expertise, different expectation of the future, values the same stock very differently and essentially plays different games with different rules - all in the same arena.
The good thing about Share Khan and Niveshika is that they know who they are and are aware of what game they are playing. But this is not the case with most other investors who invest in equities, especially individuals such as you and me. Let's just sit back and think about the last 5 investment decisions we made and note down the rationale for each of them. We would notice it often isn't consistent. Sometimes we buy stocks or mutual funds because someone, who could be the equivalent of either Share Khan or Niveshika in our social circle, suggested mentioned this to us in a social gathering, and we believe they are really good at investing. Or we read about the bright prospect of a stock in a news article, or we saw a 'renown' 'expert' on TV recommending a strong buy on a stock, or a YouTube influencer giving a stock review.
There is no one-size-fits-all approach to investing. It necessarily has to be personalized (though not necessarily complex), depending on factors including your age, income levels, accumulated wealth, dependents, nature of your job, your interests, your goals and aspirations, and your temperament among others. In fact, the approach may need to be changed if there is a change in any of these factors (e.g., new goals, inheritance, decision to start-up). But it is essential to know why you are investing into something - and whether is it most suited to meet your specific requirements as they stand today. It requires discipline to first know the game you are playing and play it by the rules. Here are some simple suggestions to help play your own game:
Drown out the noise
In this age of information overload, there are always going to be stories of someone making 5x returns in 5 months, striking gold in Bitcoin, or becoming a billionaire. There is always going to be some advisor giving his review on an investment (with absolutely no skin in the game), or some news article popping up in your feed with a stock suggestion. Do realise that when a million blindfolded people throw darts, there is a fair likelihood of someone hitting at or near the bullseye. Understand that these experts have been wrong in the past, and will be wrong in the future. Or they may be right in a context which is irrelevant to you. Learn to ignore!
Stop comparing and following others
"My colleague made a 21% return on his investments, I am only at 12% - I need to do what he is doing" - and such other thoughts are not uncommon. However, we only see the returns made by others, the risk is always invisible, especially in hindsight. Moreover, the context of your colleague may be very different, and while he may be justified in taking that risk, it may not be a prudent thing for you to do.
As an extreme example, consider a game of Russian Roulette, having a 100 chamber gun with a bullet in 1 chamber and 99 blanks. The reward of $1 Mn on a blank shot and your life with the 1 bullet. Would you take this bet? Now consider someone who is being chased by the mafia because he lost money borrowed from them in gambling. Would he consider it? Now lets assume he played the game, hit a blank, and made a Million Dollars. Will you follow his next investment (or gambling) advice given his exceptional returns? Replace the Russian Roulette game with an investment in a stock or a startup, and the mafia with a bank. Now, will you follow him? More importantly, are you already following him?
Write down why you are making an investment decision
This is perhaps the simplest hack to stick to our game. Putting the rationale on paper forces us to think about the rationale in the first place. It helps firm up our thoughts and aids the decision making process. The next time we think about investing in a mining company because our colleague expects it to double in the next 6 months, this simple act of putting the rationale on paper will make us think again. And if we do invest after that, it will serve as a reference to improve our decision making in the future.
Until next time!
Do let me know if you think there are other things we can do to stick to our respective games. I look forward to your thoughts and comments on this topic.
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