Ravichand on his blog writes about how winners bet selectively. The Question that investor face – Do you chase many mediocre opportunities in the market and bet frequently or search for a few great opportunities and bet selectively?
In the absence of a crisis, great investing ideas/opportunities are very rare and you generally get one or two of them in a year. Many good ideas can only be a poor substitute for a single great idea. Yet we want some “action” in the market every single day and many times we end up placing bets on even moderately good ideas. Why?
The possible reasons: Need for “action” or seen doing something; No one is sure when the next great opportunity will come and/or how big it will be; Professional fund management compulsions; Sitting on Cash on the sidelines without swinging your bat is nerve-wracking; Not many have the luxury to sit all day long “reading” (working)
Quoting Buffett is a cliché but many times it’s the most appropriate. If you think that you would need a large number of investing bets because you have a big corpus then spare a minute to have a look at Warren Buffets investments in marketable securities. Around 87% of his USD 173 billion worth investments at the end of 2018 were concentrated in just 15 securities. By betting selectively on a few great ideas, Buffett has made a fortune.
The research study also highlighted this fact that investing only on our high conviction ideas and consciously avoiding mediocre lower conviction ideas will do wonders to our portfolio returns and our investing career.
5 C’s of selective betting
Competence: The skill required to find great ideas. You cannot become a great Pastry chef if you don’t know how to bake. Similarly, if you are going to bet selectively on great ideas then you should first be competent enough to identify one.
Cash: Adequate Funds to back the great ideas What is the use of a great idea if it cannot be backed by adequate funds. Allocate too little and you cannot really feel the impact. Allocate too much and your portfolio can get wiped off. Always back great ideas with materially significant allocation which is neither too little or too much
Conviction: High confidence in your idea When you bet, place your stakes on an idea on which you have the highest conviction. The one which you believe has the best chance of success backed by research, data and thought. Betting selectively in great ideas only requires a bundle of confidence. Confidence is needed in your investing process, in your investing strategy and most importantly in – YOURSELF
Courage: Courage in times of crisis. Great opportunities come usually when there is a crisis or what you say as “when there is blood on the street”. There could be great opportunities when outstanding companies are going through a temporary problem. Courage to back up your great ideas during a crisis is priceless.
Character: Ability to say “No” Last but certainly the most important “C” is your “character” – your basic nature, trait and mental make-up. Similarly, for an investor, the ability to say “No” is a tremendous advantage. When your friends and colleagues are caught in the market frenzy, maintaining a Zen level of calmness and not biting at every cookie thrown at you requires a great temperament. Sitting on cash without hitting the buy requires character.