Once you start investing, the most important thing to do is RISK CONTROL. It does not matter what returns you get, as long as you can control the risk, you will get good average returns – and that is what matters.
Like Rahul Dravid, or Ricky Ponting. Both of them were great batsmen with an amazing ability to control / contain risk. Both of them did not go down in the hall of fame as ‘greatest’ like a Lara or a Sachin, but both had a fantastic average!
Even if you are not a trader, reading about George Soros (a highly underrated trader/investor whose investments and trades are more easily visible than the better marketed Warren Buffet whose deals hide behind the insurance walls), Paul Tudor Jones (who made money in the Japanese crash AND in the tech bubble burst.
Maximum money is made when there is a mega turn. Like the Japanese investors who were lulled into believing that 8% p.a. was a given in the Jap economy. When the market started going down, traders like Tudor believed that Fund managers will SELL (rather than buy) shares and rush to bonds. Tudor made money going long bonds and short stocks, and also benefited in the short rallies on the way down. He also called the market top in case of the tech boom.
Only traders who are far more nimble and less committed to any particular position can spot such trends. If I had a position in the JAP market in the 1990s, my mind would never have seen the forthcoming crash.
Cut to India. I have a position (in fact I have about 90% of the family money in shares, direct). Will I ever be able to see a 20% fall? No. Never. Some big short trader in the US will be waiting to go short on India, not me. I can see huge growth in bank branches, bank accounts, Mutual fund sales, ulip sales…..all these as indicators as to why the market will go from 30k to 90k to 200k. I will never, ever be able to see why the Indian market should crash. HOWEVER, I should seek contrarian views. Where will I find them? I should encourage bears to interact with me and give me their views. Finding people disagreeing with you, but, being friends is a tough ask.
What does it take to see a contrarian view:
- Knowledge of financial history: With the Jap economy not doing too well, and being dependent on banking more than on capital markets, in retrospect it was easy to see why the Jap market crashed. However, it is the long-short guys who made tons of money in the Jap crash, not the mutual funds. So go and read tons of material on the history of the markets. Reading about crashes of course is useful, but have the intellectual ability to see clearly, by applying that knowledge.
- Take a position based on 3 views: Have a small group of 2/3 people to take a position, along with your own intellectual inputs. This has to be a very friendly, strong, well read group of friends who can change intellectual positions based on fresh facts, and have understood ego control. Not easy at all.
- Have a mentor who has spent a lot of time in the market. It is surprising that I know many investors who have 30+ years experience and I do not see kids lining up to them to learn from them. On the other hand they think they can learn from books. Do not underestimate the utility of a coach/ mentor.
- Ego control, ego control, ego control Remember Ravana, Kansa, Duryodhana…were all rich and powerful once upon a time!
- Like in Chess, so in Investing – attack and defense both can be good strategies. In a bear market you need attack strategies, but once you have earned a couple of million US $, you need good defense strategies too. Sometimes you need good defense strategies to even reach a million US $.
We are in a nice market – I refuse to call it a bull or bear market (that is the job of history), but clearly a time when both attack and defense opportunities are available.
I use both, all the time.
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