Important Market lessons

Stock picking is a great profession and a very expensive hobby. However stock picking as a hobby will NEVER cease to attract men, women, boys and girls! They will just keep going at it, and it can hurt. Some important lessons:

  1. Stock picking is hard work. Real hard work. You need to read balance sheets for reasonably long periods of time – and it is dull and boring. However, that is how you start your life. Patheja forging, Supreme Industries, ATV Petrochem (which later became Supreme Petrochem), Shaan Interval, Crest Animation, Indiana Dairy, Carborundum Universal, Coromandel International, …are some of the companies which my office had done a lot of research on. We lost money for our clients in many of these companies. Real big substantial cash loss. We did make more money in the others – big enough for all of us to laugh off our mistakes. Behind the success of Rakesh Jhunjhunwala, Nimesh Shah, Chetan Parikh, Prashant Jain, Vallabh Bhansali are big teams tracking micro and macro factors as well as poring over books. Face it, none of us have these kind of resources.
  2. Market gives irrational returns for long periods of time: If you bought shares in 2003 when the index was 3000, IT MADE NO SENSE at all to be holding beyond 6000 index. After all no way how you could have got this kind of a return long, right? Wrong. Market went up from 6 to 9 to 15 to 21000. Staying invested was not easy. Some people benefitted by staying, some by leaving. It is impossible to use history to decide what to do. You have to sell depending on your need. Also sometimes a good market may lead to a better market. Difficult calls that you take yourself.
  3. When there is no need to take risk, DON’T: You had kept money for your child’s education in 2020. However a good bull run has helped you come within 20% of the target amount. We are 3 years away, what to do? simple. Take the money and put it in a bank or in a money market fund – after all meeting you goals is FAR FAR more important than beating the sensex.
  4. Market is called ‘The Great Humiliator‘ – exactly when you think that you have understood the market, it slaps you hard! During bubbles, most investors become complacent (arrogant too) and think that the party will go on forever. Even worse, some investors become arrogant and boast of their extraordinary daily profits. Many of the investors/ traders start thinking “the market went up because they invested! Unfortunately, these investors are the last ones to take notice when the bull market ends. As the stock market starts to fall, they remain stubborn and wait for a recovery without performing their due diligence. This is a recipe for disaster. Investors who want to succeed in the long term should always try to reduce the effect of their emotions on their investments. Of course much easier said than done. It is impossible to leave emotions out of the picture when one is leveraged which will collapse upon the first downturn. Therefore, investors should carefully select the least risky securities that are likely to offer them their target return. In this way, hopefully, will we be able to leave emotions out of the investing process.

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