I have been a stock market investor for the past nine years now, and have seen a respectable performance overall.
Why respectable? Because my investments have helped me at several key phases of my life, most important being the purchase of a house property and then repayment of the entire loan on the same within 5 years (though with some support from the family).
Then, apart from a solid support from my wife, I must thank my investments to have given me the necessary “guts” to quit my job and begin on this journey of independence, where all I work for is my passion – to help individual investors like you become independent and sensible in managing your own money.
So even after doing a respectable job as an investor, what could be the things that I still rue I’d learned before starting out nine years back?
Well, a man’s (or a woman’s) heart always aspires for more…and in hindsight, always thinks that life could have been even better if he or she knew certain more things.
Even I believe my investing life would’ve have been even better (not that I have any complaints) had I known certain things that could’ve made me a better investor, especially during times of crisis and uncertainty.
So I’m jealous of you if you are just starting out as an investor, because here in front of you lie the lessons that, if you know and appreciate and then inculcate into your investing habits, can take you much farther than you now expect to go.
Even if you have been an investor for long, these lessons might serve as a reminder of the investing wisdom that you must never forget.
Here’s the wisdom of a few great investors, condensed into eight life-long investing lessons:
- Avoid self-destructive investor behavior
- Understand that crises are inevitable
- Historically, periods of low returns were followed by periods of higher returns
- Don’t attempt to time the market
- Don’t let emotions guide your investment decisions
- Recognize that short-term underperformance is inevitable
- Disregard short-term forecasts and predictions
- Don’t make decisions based on variables that are impossible to predict or control over the short term
Click on the image below to access these lessons in greater detail. If you can’t see the image below, click here.
Source of Document: Davis Advisors
By the way, today is the last day to participate in the “Safal Niveshak 1st Anniversary Contest”. If you haven’t done that already, click here to participate.
Dear Vishal,
Excellent material!!!
Please do paste the summary sheet in the attached file in this post itself. It says everything. Every investor, whether he is investing in or redeeming out should go through that summary sheet before taking such action.
Thanks Ajay! I’ve included the lessons in the post above. Just realized that these were 7 lessons and not 8. But since the hyperlink has been created and shared with readers, I have not corrected the count…and have broken the 7th lesson into 2 parts. 🙂
Thanks anyways for the feedback!
I think the best slide to keep one disciplined is by P. Lynch. It is a great slap for those seeking to time the entry perfectly. The best and the worst days for investment in a week/month/year will be known only in hindsight. So it is more prudent to be disciplined in welath creation.
Another report I read somewhere had hypothetical investment done at start of month, middle of month and at end of month for rolling five year periods. The results differed only by 1% at end of the period. This shows that Time, Not Timing is more important in the scheme of things.
So much to learn and assimilate….. phew.
Great Insights from legendary masters.
There was a recent study in US by Mutual Fund Association. Even there, the results were the same: While the funds themselves gave good returns, the fund “investors” didnot earn and a number of investors actually underperformed. Closer home, my friends in mutual fund industry tell me that people were merrily continuing SIPs when mkt was going up and up betwen 2003 and 2008 but discontinued them during crash in 2008. Result: they missed out on stupendous 100% return in 6-7 months in April 2009. Those who were disciplined made good. The lessons are simple and therefore, difficult to implement.( The Bawarchi Dialogue). People don’t realise that SIP will outperform ONLY in volatile market. In one way bull market, SIP is always going to underperform vis a vis lump sum investment. They discontinued their SIP when in fact was the time for their SIPs to show its benefit.
It is very true that the biggest enemy of an investor is he himself. You have great nuggets in a nutshell. Thanks
That’s right, Sanjeev! I know a lot of people from my distant family and circle of friends who did exactly what you mentioned above (discontinued SIPs or redeemed after the fall of 2008). Fortunately I had ingrained these lessons in my investment philosophy much before 2008, so am still smiling. 🙂
As Charlie Munger says, “There is no greater fool than yourself, and you are the easiest person to fool.” I wish investors take lessons from the past and avoid such mistakes that can cause the difference between a comfortable retirement and a troublesome one.
Vishal, it’s a great document and we must go through this from time to time.
However, I have a small query regarding Mutual Funds and SIP investment, since Bhatia ji raised a point.
It is believed that there are three types of risk in the stock market – Event risk, Time risk, and Market risk.
Now, by diversifying across a range of securities and holding them for a long time you can eliminate, to a certain extent, Time risk and Market risk, while Event risk (such as 2008 financial meltdown) still remains.
Now, I feel that even through mutual funds investment you are still exposed to the vagaries of uncertainties of the stock market. You still need to keep a track of your investments and need to cash out at the right time to prevent Event risk wiping off all the gains. Also, even with SIP, i am not sure how long is long term, is it 7 years, 10 years or 15 years. Ex-Fund managers like Nilesh Shah have themselves said that only invest in SIP if you want to invest for 10-15 years, but ultimately I will have to cash out, which means Timing risk remains. I can continue my SIP for 10 years but in the eleventh year some black swan event may wipe out all the gains of the past 10 years.
Now, different mutual funds provide different returns. That means Market risk cannot be eliminated altogether. I can’t shuffle my investment every now and then based on the past returns. You have said on past few occasion that we must look out for star fund managers like Prashant Jain. Isn’t it like betting on Jockey than the horse. And, what if that star fund manager leaves, do I shift my portfolio to some other fund??
And, beside everything there is huge cost to MF investments, there is administrative fees, transaction cost, entry loads are not there but there are commissions etc. etc..
Then, most investment gurus have advocated for index funds, but you have very successfully demolished the myth of index fund investing in India in one of earlier post.
Therefore, isn’t it feasible that rather than focusing on MFs, we must focus on investing in certain companies that are utlinig capital efficiently, providing good return on capital, have a reasonable chance of accumulating stable earnings, have decent management and are available at reasonable price. At least, we know when to move out and when to get in, which is the essence of investing.
I really don’t know if all this makes any sense or not….
Very well put Manish. With Vishal’s permission, let me add my two cents (Rupee is depreciating, you know 🙂 ) …..
First, the market risk is not entirely removable. Market has two risks, the non-systematic risk can be removed by diversification but the systematic risk affects the market as a whole and is not removed by diversification in different securities. You must have heard rising tide lifts all boats. Similarly, any market fall will affect Most of the securities to a certain extent. This Systematic Market risk can be removed by asset allocation across the five asset classes – Cash, Gold, Real Estate, Debt and Equities. The idea is to put in your investible surplus across these assets to optimise your returns and balance periodically.
Unfortunately, Asset Allocation itself is a much abused term these days 🙁 . The best way is FIRST and FOREMOST to define your goals, the goals which have to be SMART – Specific, Measurable, Attainable, Realistic and Timely. Your goals will decide how much money you will put where. Your investment criteria for a goal which is 2 years away will be entirely different from one which is 10 years away. This is precisely to take care of what you term as “Black Swan Event” or losing the entire gain in 11th year.
Let’s say you intend to accumulate corpus for your daughter’s marriage in year 2025. Since you have time on your side, you try to take full advantage of equity and you keep on investing to achieve that goal. As the time nears, you start shifting partly your funds from equity to debt as 2015 nears. Lets say you redeem 20% of your MF in 2012 and invest in debt fund, another 30% in 2013, another 30% in 2014 and final in 2015. What is MOST IMPORTANT is YOUR ACHIEVING THAT GOAL, NOT WHICH WAY YOU ACHIEVED IT. After all, you don’t need any certificate from Vishal or anybody else that you made so much money in stock market, do you 😉 . What is paramount is getting the required funds in time for your daughter’s marriage. If you are moving from city A to City B, it does not matter how or in which vehicle you reach there, what is important is whether you have reached safe and sound well in time.
For the same reason, you don’t need to rework or rejig your MF investments every quarter. In my opinion, if the fund house is good, the fund manager is ok, you should only see its performance every half year relative to broader market. If it has reasonably outperformed (caveat: Even the best fund managers can have short term underperformance, read todays attachment again 🙂 ) , there is no need to switch. Again, as long as you are on path of fulfilling your goals, you need not worry. Here, a little bit of study of MF parameters like Sharpe, Treynor Ratios, SD, Beta etc can help you a lot.
Index funds you have already discarded to which I agree completely.
In my humble opinion, there is no harm in having some exposure to MF investment. After all, you are trying to take advantage of somebody else’s brain and knowledge (do not have any doubt on your capabilities, so don’t take any offence 😛 ).
No doubt, the path of direct stock selection will be much better than going entirely through MF route but for a simple problem. It is not so easy “investing in certain companies that are utlinig capital efficiently, providing good return on capital, have a reasonable chance of accumulating stable earnings, have decent management and are available at reasonable price. 🙂 ). I wish it was that simple. Why, despite your best calculations and everything, things are always not going to go your way as planned. I am sure even Vishal would have made some wrong calculations somewhere or got some duds in his portfolio sometime.
Essence of Investing, to me , is NOT “when to move out and when to get in, BUT When and How to achieve what we want to achieve. regret to differ 🙁
Thanks
Hi Sanjeev,
First of all, there is nothing to regret here. 🙂 We are all trying to learn and become better investor through each other experience, so each opinion is valuable.
Yes, I agreed completely about your point about asset allocation (no matter, howsoever, it is abused these days ;). I am reading few things about shifting my money as you have said, but still a bit unclear about the process. Need to read some more grrrr….
Well, my last line was related to stock investment, and not wealth accumulation 🙂
And i agree that it is not simple. After all, Warren Buffett summed it up so beautifully when he said ‘Investing is simple, but not easy’. If it is so easy, we all would have been cruising on expensive holidays rather than picking each others brain over here 😛
But, I like interacting with you and others on this forum. Its a great learning experience for me….
Excellent Vishal
But the problem is majority of the investors learn from their own mistakes (including myself) and many times forgot the lesson learnt in the last crash when they see new bull market.
Dear Vishal,
From my personal experience from investing in funds, I would like to add the following on what this 8 insights means for a small Indian retail investor who is mostly dependent on a monthly salary with lots of financial responsibility ahead of him:
1. Avoid self-destructive investor behavior:
Since 2006, I remained disciplined in investing. I invest in funds only though SIP/STP route. I invest in line with my asset allocation. I invest according to my risk profile. I invest only in quality funds with long term goals in mind and do not switch funds on every news and reports. I do not redeem funds in panic situation (May 2006 & Sept 2008 & March 200) and I do not over invest in funds (Nov 2007 to Jan 2008) during bubble bull market.
2. Understand that crises are inevitable:
I understand crises are inevitable. Since 2006, I have come across so many – Dollar carry trade, Dubai default, Sub Prime crises, Ireland bankrupt, Greece/EU crisis, Political crisis in India, Election – Prospective hung parliament and many more. Yet the market still operates, falls then raise and gets over each crises. So for a retail investor these crises don’t matter. Investment made during such crises times have compensated me against the losses of investments made during the crazy bubble times of the market. If you take a very long term chart of Sensex those falls are rise are not be noticeable now.
3. Historically, periods of low returns were followed by periods of higher returns:
Yes, my returns following crash in the market in 2006, 2008 – 2009 were far superior than any other period provided you were investing in those pessimistic times.
4. Don’t attempt to time the market:
It is futile to do this. My few attempts to time the market always resulted in negative result. I have realized it early and therefore I invest only via SIP/STP. My current portfolio standing proves that SIP/STP works.
5. Don’t let emotions guide your investment decisions
I looked like fool in 2006 to 2008, when I did not invest in Infra Funds. I stuck to my chosen diversified funds. I never ventured in to exotic infra funds. In 2012, when I compare those funds with my chosen funds, I was right in not letting emotions guide my investment decisions.
6. Recognize that short-term underperformance is inevitable:
Yes, I have experienced this in 2 of the best funds in the market. HDFC Top 200 & Franklin Bluechip fund. There were serious under performances in 2006 to 2008 period when the market was going through a crazy bullish period. It was a short term lag in performance. Look at the performance now on a 5 year basis and you will get to know the difference . Even now HDFC Equity is negative on 1 year basis and under performing some other peer funds . But, it is only a short term under performance, don’t read too much in to it and it is inevitable.
7. Disregard short-term forecasts and predictions. Don’t make decisions based on variables that are impossible to predict or control over the short term:
Yes. Switch off CNBC and other profit channels. There was a period when I used to watch Indian Market Opening, European market Opening, Indian Market Closing, American Market opening, European Closing, US closing, Japanese opening, Chines opening, Singapore Nifty and watching every forecast and predictions. When I look back, I feel shameful and foolish. It was the business channels drove me to this madness with forecasts and short term predictions. Watch every other business programs (so called trading and investing ideas, financial planning programs etc). Even now TV channels talk about what is the target of the 2012, 2013, 2014 some even talk about 2015. No one in 2006 predicted that the market will be 21000 in 2008. No one in 2009 March predicted that the market will touch 20000 in 2010. But the same guys repeatedly target the same foolish audience with repeated targets that they too know it may or may not happen. In the long term those targets doesn’t matter. As Vishal put it as a joke in one of his post, the reason that God sent those Analyst is just to make the Meteorological Guys feel better about their predictions. Prediction and forecast may be good and job of Meteorologicalguys but not for your financial health.
My understanding as a lay Investor (after going through various phases, although 6years is not a long term) is that I have no control over any of the happening around the world that can affect my Investments. I cannot predict the same nor can control it. So what ammunition I am left with? They are as listed below and I have to use it effectively (these things are certainly in my control):
1. Habit of Saving the maximum possible.
2. Disciplined and Systematic Investment
3. Know your risk taking capability.
4. Identify your goals (choose destination).
5. Identify your investment tool (choose vehicle).
6. Educate yourself before investing (get driving lessons).
7. Begin your journey steadily and safely (Begin your Journey).
8. Maintain asset allocation as per risk profile (maintain speed to reach destination).
9. Re-allocate funds based on your goals & asset allocation and not because by market condition (while driving you check at current speed and accordingly, what time you are likely to reach destination and vary speed accordingly).
10. Continue to invest patiently without bothering short term news, surprise, black swan events that are beyond your control. Don’t stop your investments based on those short term news. (While driving you may come across accident news, see some accidents, come across various hurdles but I am sure you always continue to drive to reach your destination – The same is for your investment journey).
11. If you do the above you will reach the Goal (The Destination).
12. In the process, you take adequate term insurance and medical insurance (like personal insurance and vehicle insurance).
I have practiced the above since my 2006 (at the age of 34) and still learning every day to get matured in investing. I have a regret too. The regret is that I have started little late. Had I started my investment journey little earlier say after 2000 or before or even since 2002, I could have comfortably reached my destination by now.
Regards
Proud Safal Tribesman
Wow Ajay.
Beautifully Put and explained, especially the Ammunition at the end. Deserves to be a complete post in itself. You seem to have got the gist of all investing mantras in such a short interval. Congratulations.
Not to regret, atleast you have started the journey in a well planned, disciplined manner. There are thousands who don’t even know what journey they have to take…. 🙂
Wonderful post.
Another proud safal niveshak tribesman
Thats’s a wonderful document Vishal.. Really great insight..:)
Thanks Sanjeev ….
Thanks Ajay for such a great discussion above! Regards.