Author - Tanmay Gadre

Common Characteristics of Successful Private Investors

Many successful investors around the world follow different strategies to generate meaningful returns from their investments. But there are few similarities in things that they do.

Here, we speak of such characteristics commonly seen among private investors that turn them into successful individuals. Following are these habits:

  • Future time perspective: We tend to see our experiences through a past, present, or future time perspective. Eg- People with a present-time perspective may want to earn a big salary now and spend it. Whereas, successful investors start investing early. They seek uncertain future gains from the compound interest on their capital. They take a calculated risk today for earning gains in the future. They inculcate the habit of viewing opportunities through a future time perspective.
  • Investing for Freedom: Most successful investors can show off their money if they want to. But they instead choose to live a not-so-flashy life. Many investors start small and they earn money the slow way. They patiently build wealth by spending less and investing it over a long duration. They know that having more money than they need will result in freedom. Having more money frees up their time to use it for activities that they want to do.
  • Avoid borrowing to invest: Using debt in volatile markets works until the market turns down. It may erase all the gains and the capital with it. One can lose more than one started if one uses borrowed money to invest. Successful investors invest their own money after conducting research and then wait patiently. They know that once invested; they should let the compound interest work for them. This is how they generate meaningful returns on their investments without borrowing money.
  • Not team players: Investing requires one to not be part of the herd. Most successful investors are not team players when it comes to investing. They may take help from other people for research or may work with a team for a few activities. But when it comes to taking an investment decision, they understand that it’s to be done individually. There are many variables within investing which differ from person to person. Investment goal, time horizon, sector preferences, etc. This makes it a job to be done on one’s own.
  • They enjoy investing: Successful investors can put the money in passive portfolios and use their time for doing something else. But they choose to be active in markets. Some do it because they believe that they can generate good returns using their skills. Some do it because they enjoy it. Many actively traded portfolio investors keep on working despite having more money than they will need.

Some of these characteristics are simply natural to an investor. But other characteristics can be learned over years. Even a novice investor with few months of experience in the market can read, observe and learn to benefit by inculcating these characteristics in oneself.

 

Source: https://monevator.com/habits-of-successful-private-investors/

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered investment advice or research recommendation. The users should rely on their research and analysis and should consult their investment advisors to determine the merit, risks, and suitability of the information provided.”

This week in a nutshell (16th August- 19th August)

 

Technical talks

NIFTY opened the week on 16th August at 17,797; with a holiday on Monday, the four-day work week ended with NIFTY closing at 17,758 (-0.2%). The index is trading above all the moving averages on a daily as well as weekly timeframe. On the upside, the upper Bollinger band level of 18,123 might act as a resistance. On the downside, it can take support at the 50-week moving average near 17,134. Even though the RSI of 61 does suggest some caution, in the recent past NIFTY has comfortably traded at a 60+ RSI level.

Among the sectoral indices, REALTY (+1.6%), INFRASTRUCTURE (+1.5%), and FMCG (+1.2%) led the gainers, whereas PSU BANK (-1.1%), PHARMA (-0.5%), and BANK (-0.1%) were the losers this week.

Weekly highlights

  • September 1, 2022, has been fixed as the Demerger Record Date for the purpose of confirming the names of shareholders of the company who would be entitled to receive equity shares of Piramal Pharma (PPL). A shareholder with 1 share of Piramal Enterprises (PEL) is entitled to get 4 shares of PPL.
  • Auto manufacturer Mahindra & Mahindra announced that it would introduce five new electric Sports Utility Vehicles (SUVs) for both domestic and foreign markets. The first four of these vehicles are scheduled to go on sale between CY24 and CY26.
  • For the first time, large quantities of petroleum coke are being imported by Indian businesses from Venezuela. India’s increasing demand for Venezuela’s petcoke, an oil refining byproduct and coal substitute, is being driven by a race for low-cost fuel to power factories as the price of coal has skyrocketed globally. Petcoke is mainly used as a fuel source in power plants.
  • As vegetables, milk, and fuel became less expensive, India’s wholesale inflation decreased sequentially in July to 13.93%, but it stayed above 10% for the 16th consecutive month. The WPI inflation moderated as a result of a decrease in the inflation for food goods, core-WPI, crude oil and natural gas, and major non-food items.
  • The government on Thursday increased the windfall profit tax on diesel export to Rs 7 per litre from Rs 5 per litre earlier. The government again imposed Rs 2 per litre tax on the export of aviation turbine fuel after scrapping it earlier this month. While introducing the new levies, the government had said that it will review exports and imports of these items every fortnight to amend its decision.
  • Gold dropped to a 3-week low on last Friday due to fears of the US dollar strengthening, and an interest rate hike.
  • US stocks closed lower on Friday, with indexes volatile after minutes from the Federal Reserve’s meeting in July suggested policymakers may be less aggressive than previously thought when they raise interest rates in September. The S&P 500 was down 1.2%, Nasdaq 100 was down 2.3%, and Dow Jones was down by 0.1% respectively.
  • FII (Foreign Institutional Investors) were net buyers of shares worth Rs 31,290 mn and DII (Domestic Institutional Investors) were net buyers of shares worth Rs 18,089 mn this week.

Things to watch out for next week

  • The corporate results season for the April-June quarter of FY23 has come to an end. Market movements are likely to be company specific. As the result season ends, investors’ attention will now be on management comments at the AGM (Annual General Meeting).
  • Federal Reserve Chair Jerome Powell will address the annual global central banking conference in Jackson Hole, Wyoming, on 26th It’s a highly anticipated speech that could signal how interest rate hikes will pan out and how long they will need to stay there to bring down soaring inflation.

 

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

 

What do investors believe they can do but can’t? (Part 2)

 

In continuation with our previous post, following are a few situations of what we think we can do, but probably can’t:

  • Ignoring an attractive bad investment story: Generally, a bad investment comes with an attractive story. At first, we ignore the story and we think that only other people will fall for such a story. But after some time, the story starts building. We see people invest in it, and we feel that it’s a good growth story. Eventually, we end up investing in it. As the basis of the story falls out, the investment loses its value, and we end up losing our invested capital. Most investors feel that they won’t fall for such stories, but they end up falling for them.
  • To be a long-term investor: Long-term investing is very difficult to do, but it also rewards greatly. Doing very little seems like an easy task. But the temptation to act is so often overwhelming. Acting a lot, and doing something is often the opposite of doing very little when it comes to investing. Every day brings a new story, a new doubt, and a new opportunity. There’s always a new reason to be a short-term investor. Many feel that they can be long-term investors. But only a few people can do it.
  • Benefit from extremes: Most of what we witness in financial markets is just noise, but extremes matter. When performance, sentiment, and valuations are at extremes (either positive or negative) the opportunity is for investors to take the other side; Yet, many investors are afraid of losing their capital. They feel that being part of the crowd will save them from taking wrong decisions. Such investors don’t benefit from the extremes of the market.
  • Overcoming terrible odds: Investors frequently make decisions where the odds of success are incredibly poor. We think that we will make money by investing in a star fund. But we forget that we are looking at the historical performance. The same performance may or may not repeat. There are many more factors that might have resulted in the success. But we invest without considering these facts.
  • Find the ‘one’ investment:Investors are aware of the benefits of diversification. But it feels a little boring and represents an admission of our limitations. We would prefer to find the ‘one’ investment that will transform our financial fortunes. Whether it be a stock, theme, fund, or ‘currency’. Such ambition may not end well. We feel that we may find that one investment and make a fortune. But diversification proves to be more beneficial.

The author concludes that being humble about the challenges of financial markets and aware of our circle of competence is very valuable and an investor should avoid becoming one’s own worst enemy.

 

Source: behaviouralinvestment.com

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

What do investors believe they can do but they can’t? (Part 1)

 

The author Joe Wiggins says that poor investment decisions take place when our expectations of what we are capable of exceed the reality.

Following are a few situations of what we think we can do, but probably can’t:

  • Timing the markets: many investors try to predict what will happen, and when will it happen in the stock market. The ‘when will it happen’ part is considered as timing the market. The stock market is considered as a complex, adaptive and a chaotic system. Forecasting ‘when will it happen’ is very difficult and usually can’t be done accurately. Yet, investors think that they can do it and continue to do it.
  • Truly understanding complex funds: Many funds are complex in nature. Such funds promise high return with low, differentiated risks. Investors usually don’t understand the nature of such funds. Yet, they are attracted to the high return promises made by these funds and invest in them. They break an important rule of investing. Don’t invest in things you don’t understand.
  • Predicting Inflation: Macroeconomic variables are affected by many factors. One such variable is inflation. Inflation is usually affected by many factors. It is hard for an investor to predict inflation. The investor doesn’t know which all factors are playing the role at a given time. Hence, the investor won’t be able to predict the inflation estimates accurately.
  • Pick funds that consistently outperform: A myth in fund investing is that any manager or strategy can consistently beat the market. Even a skillful fund manager will underperform for prolonged periods. Many times, we fail to realise this. Due to this, we get trapped in a painful cycle of selling losing funds and buying yesterday’s winners.
  • Withstand poor performance: Weak performances are almost impossible to avoid for any strategy, fund or asset class. These scenarios are easy to deal with in theory. But in practice, the experience is entirely different. An investor can have stress, anxiety and doubts during difficult periods. An investor may feel that a poor performance can be completely avoided throughout the life of the investment process. This leads to making poor decisions at just the wrong time.

 

Source: behaviouralinvestment.com

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

How to Invest during High Inflation period?

 

Before we answer this question, let’s know how exactly does inflation affect investing:

How does inflation hurt?

In an inflationary environment, input costs for product-based businesses rise. Therefore, businesses have to increase the selling prices of their products. The end consumer ends up paying a high price for the same product which used to cost less before. Else, the business can keep the prices same and reduce the quantity of the product. Here, the consumer pays the same price, but for less quantity of the same product.

If the prices remain inflated for a prolonged period, it starts affecting the purchasing power of the consumer. It affects the demand for the company’s products. Sales volumes of the companies reduce. The company’s future growth is also negatively affected in such an environment. This has negative effect on its stock price, thereby reducing the returns for its investors.

Is there any way to invest in such an environment? There is! Let’s look at it:

  • Service based companies may not be affected by high inflation. Eg- Software companies.
  • Some companies can increase the selling price and still retain demand. Such companies have a good pricing power.
  • Some companies sell luxury products at very high prices. The demand for their products remains constant even if they increase the price of their products. That’s because their customers are not affected by inflation as much as the common man.
  • Some companies come under the category of consumer essentials. Their products are essential in the day-to-day life of their customers. The demand for such products doesn’t go away.

An investor can look for such companies that provide these products/services. They can invest in these companies even in a high inflation environment. An investor should keep it in mind that this environment doesn’t last for life time. But the stock prices may decline during such an environment. An investor should use this opportunity and invest at low prices in companies with sustainably growing businesses.

 

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

Luck vs Skill in Investing

 

Luck and skill play a part in investing. But the author Mr. Jeremy Chia says that many of us attribute our poor performance to luck and good ones to skill.

So, let’s learn more about luck and skill, shall we?

Understanding luck:

In a world full of unknowns and wide range of possibilities, luck plays a significant role in the final outcome. More than we want to believe. This wide range of possibilities can be seen in the profession of investing. Short term prices are volatile and random, and are influenced by luck. The long-term prices are also influenced by luck.

Long-term stock prices tend to be around the present value of the company’s expected future cash flow at the given time. The future cash flow is influenced by many factors. They result in a range of different cash flow possibilities. On many occasions, the market may also misprice certain securities. Hence, we should acknowledge that when it comes to investing, the future is not certain. There always will be a range of different possibilities.

Identifying skill

The next step is to separate luck from skill. Skill in investing is hard to quantify. We need to analyse a sufficiently long track record. An investor can outperform his peers for decades rather than just a few years. Then the odds of skill playing a role become significantly higher. Warren Buffett may have been lucky in certain investments. But no-one can deny that his long-term track record is due to being a skilful investor.

How to identify?

Focus on the process. Analysing an investment manager’s process is a better way to judge the strategy. Compare his original investment thesis with the eventual outcome of the company. If they matched up, then the manager may by highly skilled in predicting possibilities and outcomes. Find a larger data set. Your investment strategy may be based largely on investing in just a few names. Then it is difficult to distinguish luck and skill because you’ve invested in only a few stocks. The sample is too small. But if you build a diversified portfolio and were right about the investments, then skill was more likely involved.

Our investing success comes down to both skill and luck. Hence it is hard to separate luck and skill.

 

Source: thegoodinvestors.sg,

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

How do Interest Rates affect Stock Valuation?

The central banks around the world are raising interest rates to reduce inflationary pressures. But do these rising rates affect stock valuation? Let’s find out:

A change in the interest rate changes generally impacts the stock market immediately, whereas, for the rest of the economy, it may take about a year to see any widespread impact. Although the relationship between interest rates and the stock market is fairly indirect, the two tend to move in opposite directions.

Companies that have borrowed debt will experience an increase in borrowing costs. This will impact the profits and cash flows of such companies. This in turn will negatively affect their stock prices. Higher interest rates will increase the fixed income yields and make them more attractive. Stocks would now require a higher rate of return to compete with these higher-yielding instruments.

Higher interest rates tend to negatively affect earnings and stock prices (with the exception of the financial sector). In theory, higher interest rates impact high-growth companies more than low-growth companies. Most of the current value of high-growth companies is derived from cash flows generated much later in the future.

But there are still 2 reasons to stay invested in high-growth companies:

  • Many high-growth companies are capable of providing a higher rate of return even if interest prices keep on rising.
  • Interest rates tend to impact valuations only temporarily.

The central banks can’t keep on raising interest rates forever. They reverse the rate change once the monetary policy measures taken are effective enough. These are short-term changes and shouldn’t affect an investor if it’s a long-term investment. Once the central banks announce an interest rate cut, the assumption is consumers and businesses will increase spending and investment. This can cause stock prices to rise.

What to do in such situations?

Instead of being worried, one should stay invested in companies having good long-term growth potential. Investors should invest in companies that have low or zero debt. Low debt companies can service the debt even if the interest rates go up. An investor should focus on the quality of the business. Good quality businesses can do well even in a high-interest rate environment. Understanding the relationship between interest rates and the stock market can help investors understand how changes may impact their investments. They can also be better prepared to make better financial decisions.

 

Source: thegoodinvestors.sg, investopedia.com

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

What if Stock Market Remains Closed Forever!

Mr. Jeremy Chia suggests that long-term investors shouldn’t bother even if the stock market remains closed forever. He says that even if we are never able to sell our shares, a truly good investment bought at the right price should still pay off over time. How? Let’s read:

An investor can’t sell the shares if the stock market will remain closed forever. Yet, the investor will remain entitled to future dividends of the company. The goal of a long-term investor shouldn’t be simply to sell off an asset at a higher price to a buyer. It should be to hold an asset for its cash flow creation capability.

Many companies are in different phases in their lifecycles. If a company is growing rapidly, it may not pay dividends. After some time, once it matures and it starts building up excess cash. It can then start paying dividends to its shareholders. But one has to remain patient for that. If the stock market remains closed forever, these patient shareholders will eventually start receiving dividends. These dividends will eventually exceed what they paid to buy the shares.

Therefore, an investor should invest in a stock after checking the following:

  • How much cash flow can the company potentially generate?
  • Can I receive back what I paid for buying the stock by simply collecting the cash flow over the years?
  • Will I eventually get more than paid for even if no one offers to buy the stock in the future?

If an investor has paid too much for the stake in the company, the investment may not pay off. Even a high-growth company may not generate enough cash to reward such a shareholder. In today’s market, many investors have bought a stock hoping to sell it to a “greater fool” at a higher price. They don’t buy it to benefit from the cash flow of the stock and are unlikely to make back their capital.

 

Source: thegoodinvestors.sg

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

This week in a nutshell (11th July- 15th July)

Technical talks

NIFTY opened the week on 11th July at 16,136 and closed on 15th July at 16,049. It made a loss of 0.5% during the week. The index is trading above the 10DMA level of 16,020 which might act as a support. On the upside, the 20DMA level of 16,557 might act as a resistance. The RSI (45), and MACD turning downward suggests a further possible downside.

Among the sectoral indices, ENERGY (+2.5%), Pharma (+2.3%), and REALTY (+2.2%) led the gainers, whereas IT (-6.3%), BANK (-1.3%), and FINANCIAL SERVICES (-0.9%) led the losers during the week.

Weekly highlights

  • The US indices closed the week in the red as investors worried that inflation and rising interest rates may adversely affect the overall demand and performance of businesses. The S&P 500 was down by 0.9%, Nasdaq 100 by 1.2%, and Dow Jones by 0.2%.
  • Israel will sell Haifa Port, a major trade hub on its Mediterranean coast, to winning bidders Adani Ports of India and local chemicals and logistics group Gadot for USD 1.2 bn. Gadot and Adani made it to the end of a two-year tender process. Adani will hold a majority 70% stake and Gadot will hold the remaining 30%.
  • The government has offered 10 blocks for finding and producing oil and gas under its Open Acreage Licensing Programme (OALP). ONGC, Oil India, and GAIL won a total of 6 blocks out of the 10 blocks by the 7th round of OALP. The government expects an investment of USD 600-700 mn in the 10 blocks.
  • The Murugappa Group will launch an electric three-wheeler brand called Montra by September and invest Rs 2,000 mn in the segment. The company will manufacture Montra three-wheelers at its Ambattur facility in Chennai. The initial capacity for three-wheelers will be around 75,000 units per year and the company will have distributions at around 40 locations.
  • Exports in June were up by 23.5% to USD 40.1 bn while the trade deficit increased to a record high of USD 26.2 bn, both YoY, mainly due to a jump in gold and crude oil imports. Crude oil, coal, and coke imports doubled to USD 21.3 bn, and USD 6.76 bn on a YoY basis. Gold imports too were up YoY by about 183% to USD 2.74 bn.
  • Exports of finished steel from India more than halved in June on a YoY to 0.64 mn tonnes following the levy of a 15% duty on all outbound shipments by the government in its efforts to increase domestic supplies and curb inflation.
  • The inflation in the US was up 9.1% YoY in June, which was the highest increase in 41 years, whereas India’s WPI inflation eased down to 15.2% from 15.9% on a YoY.
  • FII (Foreign Institutional Investors) were net sellers of shares worth Rs 59,160 mn and DII (Domestic Institutional Investors) were net buyers of shares worth Rs 21,730 mn this week.

Things to watch out for next week

  • With results season picking up, quarterly numbers are to be watched out for. IT companies like TCS, Mindtree, LTI, and LTTS have already reported earnings that were a mixed bag. Kotak Mahindra Bank and ICICI Bank are set to report earnings next week. While the provisions are not expected to be a big surprise, there could be an impact of MTM losses on banks’ earnings. Commentary from HUL would help understand the impact of inflation on margins and rural-urban demand.
  • We expect the markets to remain volatile as investors show sentiments of fear guided by news related to the macro-economic aspects like supply-related constraints, and rising inflation.

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

Bear Markets- A test of Investors’ Emotions

 

During a bear market, your portfolio’s value is falling. You are receiving news highlighting the harsh realities of the stock market. It can become tough to escape the negativity that one feels. It is not just an uncomfortable experience; negative emotions affect one’s ability to make rational decisions.

There are 3 ways in which emotions can materially affect an investor during a bear market:

  • Emotions can affect rational decision-making: Emotions may impact rational decision-making and lead us to irrational decisions. Elements that affect investors in such cases are powerful images and stories that amplify the emotional response. Fear and sense of increased risk will be increased due to anxiety and panic of other people.
  • Emotions can lead to short-term decisions: Severe negative emotions make investors vulnerable and drastically reduce their decision-making time. Acting rapidly to respond to strong emotional cues is clearly a natural instinct many times. But it impacts their ability to withstand tough periods in the market or to invest for the long term.
  • Emotions can make us ignore probabilities: In a bear market, one’s fears increase by the stories of how much worse things will get. Provoked emotions make one far less sensitive to changes in probability. The ability to reasonably assess the probability of future developments gets severely reduced. The strength of feeling outweighs the strength of evidence.

 How to reduce the influence of emotions?

  • An investor should remove oneself from the emotional stimulus. Turn off the financial market news and check the portfolio less frequently. Long-term investors should not do things that would provoke a short-term emotional response.
  • One should never make in-the-moment investment decisions. These are likely to be driven by how one feels at that specific point in time. One should always step away and hold off from making a decision. Reflect on the decision with a calm state of mind.

These aren’t solutions as one cannot disconnect oneself from the impact of emotions on investment decisions. However, one must be aware that the negative feelings of stress, anxiety, and fear that one experiences during a bear market. These may encourage some of the worst behavior and one must do the best to avoid/reduce them.

 

Source: behaviouralinvestment.com

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”