Dear Investor,
If you are a frequent reader, you would know that we have a checklist that we use to screen the companies that we invest in. Well, I was recently updating that checklist and suddenly had a realization. Just like we assign key attributes that a company must have in order to be considered a worthwhile investment, we could also build a checklist that could guide our investment decisions and help us become a successful investor.
After working on it for days I have tried to come up with a list of 5 key attributes. I have witnessed these habits in every successful investor that I have had the pleasure of crossing paths with.
Paranoid Optimist – One of our followers recently mentioned us on twitter and his comment sums it up well.
While it is important to be confident and optimistic about the companies we invest in, it is also important to be consciously paranoid about everything that could go wrong with the business. It is good to have conviction in a particular stock; however, before making any investment decision you should ask yourself, is your conviction blind siding you from the risks that are involved with that investment decision.
Contrarian Thinking – Most investors get attracted to the stock market when the markets are performing well and the companies are delivering good returns. This often causes new investors to buy at high prices and get stuck in a loss-making investment.
However, buying companies when the general suggestion in the market is to sell it, takes contrarian thinking. Warren Buffet famously said, ‘The best thing that happens to us is when a great company gets into temporary trouble…We want to buy them when they’re on the operating table’.
Diversification – Limiting downside risk is just as important as increasing upside potential. While you will always have some stock ideas that you will have more conviction in than others, it is important to remember that luck plays an extremely important role in the stock market. No matter how well you study a company there will always be things that you do not know. There will always be multiple exogenous factors that one can neither control nor predict. Given these situations, it is only logical for a good investor to diversify his/her portfolio to minimize such risks.
Patience – We have all heard of stories of how a stock went up 50x, 100x for great investors like – Mr. Rakesh Jhunjhunwala, Mr. Vijay Kedia, Mr. Ashish Kacholia etc. However, most of the times these stories do not talk about the time period for which these investors held on to these stocks.
It is important to realize that – Identifying good companies is relatively the easiest, remaining invested through downturns and periods of consolidation is tougher and buying the stock when the cycle (business/market or both) is down is the toughest.
Understanding oneself – To decide if an investment is good or not we must first understand the purpose of the investment. If a person is investing to build an emergency fund then a recurring deposit could be a good investment while if a person is investing for a retirement fund then a mutual fund could be a good investment. Since, whether an investment is a good one or not depends on the purpose of the investment, it becomes important for an investor to first understand the purpose of their investment. Having a goal based approach to investing is key to becoming a good investor.
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Best Regards,
Archit Mehrotra