Successful Investors are the ones who never lose money in the stock market. They time the market well. On the other hand, experts suggestion to retail investors is that never try to time the market. These two are contradictory stands. Are experts trying to say that retail investors can never be successful investors? In my opinion, it is not the case. One of the reasons why retail investors lose money is wrong timing. I have already discussed this point in detail in my previous posts. To join the league of successful investors, Retail Investor has to observe what successful investors do it differently. There is a lot of research on this topic but it remained non-conclusive.
In past, the analysts tried to study the investment pattern of successful investors. It will never help to find the hidden secrets, how successful investors make money. The best example, i can think of is newton’s laws. One of my MBA professors used to tell us that by studying Newton’s three laws of motion you cannot become Newton. To become newton, you have to think like Newton. The same theory applies here. To become successful investors, you have to think like them. By studying their investment actions will not take you anywhere. Though i am a small fish in the big pond but would like to share some behavioral aspects of successful investors.
Successful Investors – Five Hidden Secrets to Make Money
1. Kill the fear of Missing the Train: One of the key reason of wrong timing. This factor works both at the time of buying and selling. Today one of my friends called. He told me that market has corrected by 20%. It has reached it’s bottom so shall he start investing. I had nothing to add. I asked him to tell me three factors why he think so that market is bottomed out. He didn’t have an answer for same.
There are only 2 market positions known to the whole world i.e. Long and Short. On the other hand, when i checked the behavior of successful investors, i found 3rd hidden position i.e. NO POSITION. When i shared a post, Equity Investments – Why I Quit? What i meant was that i will take this 3rd position i.e. No Position. It is very difficult for retail investors to digest this position. The reason being, stock market investment is an addiction. You cannot stay away from it.
Successful investors often take this hidden 3rd position if the situation demands. It is not known to the retail investors. Now you will say that i also exited the market when it fell down. Here comes the difference, the smart successful investors took this position when markets were near peak and started the downward journey. Now you must be wondering how successful investors knew that market has started the downward journey. I will answer in following points on Important ratios and Myopic view. If i take No position under fear and after losing money then i will lose confidence to enter again. Thus, after losing confidence, i will not take a long position at the right time because of fear. I will wait for much longer to enter the market from the right point to invest. As i always say that retail investors enter when the party is over. There is no golden rule that you should always stay invested. Therefore, it is imp to take NO Position at the right time to retain the confidence to re-enter at the right time.
2. You cannot be right every time but you should be right most of the times: Successful investors are not right always. They also commit mistakes. You must be wondering then how they are successful investors. The answer is successful investors are right most of the times. In short, if you are right 2 out of 3 times in stock selection then you are home. The hidden secret is that successful investors never select stock based on sentiments or news. The news or sentiments can help you win the battle but not the war. Their investment is mostly driven by macroeconomic indicators and judgement on how the economy will shape up in future.
To make right judgements, you should be well versed with the influencing factors that drive the economy. I shared this point in my post, 5 biggest mistakes i made as an equity investor. I observed that successful investors trust macroeconomic data more than anything else. The best example, i can share is of public sector banks. When the govt decided to infuse money in PSB’s then they had a dream run. All the analysts were gung ho about the same. I remember daily gains of 5% in PSU Bank stocks. When i checked the portfolio of successful investors, they didn’t have a single holding in PSU banking stock. The two factors that were working against the PSU banks were rising NPA’s and competition from new banks. Therefore, there was no case to enter. Today, you can check the stock price of PSU Banking stocks.
I personally observed that macroeconomic factors rarely go wrong. Therefore, if you buy any stock you should ask yourself why you are buying. Most importantly whether macroeconomic factors support or not. If the answer is NO then move on. Because of this reason i mentioned that successful investors are right most of the times. Thanks to macroeconomic factors.
3. Control Greed and Fear: Successful investors always control their greed and fear. Basically, you should prepare a matrix of time and returns % to take buy/sell decisions. It will help to control the greed and fear else there is no way to control. . As i shared in a post that it is imp to book profits in the stock market. For example, if i buy a stock then i also decide the time and return %. This matrix varies from stock to stock. For stock A, i decided that investment period is 6 months or 20% return whichever is earlier. It is my judgement that stock will appreciate 20% in 6 months. If it has not performed as expected then i will QUIT. On the other hand, if it is appreciated 20% in 3 months then also i will exit and control my greed. Similarly, you should put STOP LOSS.
4. Important Ratios and Data Points: My readers keep asking me what all ratios and data they should check. Here i am not referring to individual stock selection but the index/broader market. It helps successful investors to enter and exit the market. In short, help to time the market. The website of NSE provides 3 important data points i.e. P/E, P/B and a Dividend yield of NIFTY. Besides there three ratios, the 4th data point is FII trading activity. In my opinion, these 4 data points help in macro-level decision making i.e. when to enter/exit the market. I will discuss it in detail in my next post.
5. Myopic View: Last but not the least and most important point. The successful investors always check data for the particular time frame. A daily data will not help in reaching any conclusion. This time frame is normally 30 days. For example, if i check daily data of FII trading data then i cannot draw any conclusion. If i check for one month then it helps to find out whether FII’s are buying or selling. The same holds true for NIFTY ratios. As a retail investor, we should not have a myopic view of data points and should look at the broader picture. It will help us to identify a trend. Once we catch the trend then no one can stop us to join the elite club of successful investors.
Words of Wisdom: I shared my personal observation based on my study. It is important to enter and exit the market at the right time based on macro-level indicators/factors. The retail investors should avoid any decision making based on individual stocks. Our individual stock selection may go wrong and that can be corrected. If the time to enter or exit the market goes wrong then even god cannot save us.
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