I started investing in the summer of 2016. As a freshman in college, I was full of enthusiasm, passion and a lot of free time! As I've continued this investing journey over the years, my returns increased and so did my capital (family funds only) and as the capital increased, in turn went down. My capital increased 5x and all my past returns got diluted. My new challenge was now trying to figure out how to allocate this increased capital, with my much busier schedule. I could not buy more of the stocks that were already in the portfolio since most of them had increased in value by at least 20%. This is when the mistakes began:
1. Cash does not compound
With all this money in my bank account, and given my solid returns in the past, I felt all the more pressure to invest in multi-bagger stocks (knowing that this was not play money anymore). This was real money with the opportunity cost of 12% and I knew I had to give back at least that much after accounting for transaction costs. With this mounting pressure, I did what most college students tend to do - procrastinate. With not enough time as a Junior (with school, and life), I ended up holding about 2/3rd of my money in cash and invested 1/3rd in stocks that I had researched hastily. Now that I reflect, I realize that what I should have done instead would have been to at least 70% of the money in a low-cost ETF (or even a mutual fund would have been worth it) instead of just letting it sit there, making 0%.
2. Feeling good about a business is not enough
The 1/3rd of the money that I invested was concentrated in only two stocks (IIFL and Tourism Finance Corp). I read research reports on both. I read the Tourism Finance Corp report via HDFC securities (my "trusted broker) and I liked the story. I saw a clear-ish catalyst that I thought would work to increase the stock price in the medium term and hence this might be good place to park my money for the time being. The catalyst was that a shake up in management would propel the company to do better than it was doing at the time. The company was also looking to divest to private investors and I "intuitively" felt that this would lead to a stock price increase. But, this was public information - so why was this not baked into the price? Umm, I should have asked that question, right? I missed an important part of evaluating the business - valuation. Is the price I am paying less than the value of the company? The problem is that I still do not know the answer to this question. Probabilistically, the answer could be yes and I could have gotten lucky. So...I still hold the stock until I figure out the value and maybe then I can make the decision to sell. The same thing happened with IIFL. One of the largest shareholders in IIFL is Fairfax and so I decided to read their annual report from 2017 and really bought into their investment thesis. The problem with that investment was that they bought it in 2017! The price in March 2018 was not the same! IIFL could be a great business but there are several great businesses!
3. Not reevaluating stocks in the portfolio
I felt pretty good looking at all of the stocks in my portfolio yielding good returns. So, I held on to them without evaluating them. A lot of those, I should have sold because I then came to realized that the opportunity cost of holding them was too high. I could have also bought more of some of those stocks since they were solid good companies and I would have made more than the 0% that I made on the cash lying around. Since time was a problem, reevaluating companies that I knew well would have been a good way to go.
4. Not betting enough on high conviction stocks
Having heard of the fancy word "diversification" several times, I chose to go that route and invest my money in several different stocks, in several different sectors. Some great, some mediocre (and hence safe). The mediocre stocks gave me mediocre returns. What I should have done instead was bet more on the stocks where I had high conviction after assessing the risk (cases where I would not have lost much if I was wrong). Doing thorough research on one stock (that is worth researching) can be more valuable that researching several stocks only so you can diversify your portfolio.
5. Why on earth did I stop writing?
I was just reading information and making decisions. I was not debating discussing them. In the past, I had done okay because I spent a lot of time debating myself as I prepared content to write my blogs. I continued to write - personally and philosophically because I know for a fact that I personally process information better when I write but I completely stopped writing about investments. When I write about stocks, it is as if I am writing to convince someone else of my thesis and hence I force myself to think from another person's perspective. I am, in a way, telling people that this is where they should put their money - and people work very hard to make money. Hence, I make sure the analysis is thorough, which in turn helps me. So yeah, I should not have stopped writing. My last post was in 2016 - Jesus Christ!
6. Unorganized approach
So, how do I invest? What is my criteria for picking stocks? How do I decide how much to invest? What is my sector allocation? The problem is not that my answers to these questions are incorrect or speculative. The problem is that I do not have an answer to these questions. In the past, I have not been very systematic with my investment approach since I considered it only a hobby and something I was doing to learn versus a serious endeavor. I have now realized that this is something that I am passionate about and need to develop an organized approach to research and mange my portflio.
7. Investors
Sometimes, clients don't know what is best for them. Sometimes, clients are your parents. Everytime I would sit down to do research or invest, my dad (and my biggest investor) would give me his expert advice. The problem with that is that I thought he was must be right only because he is my dad, and he is my "client". Instead of trying to explain to him my philosophy, I just started listening to what he said. He told me to hold for short periods of time and sell as soon as I had made anything north of 15% (regardless of anything). This is fundamentally against my fundamental value investing approach! Of course he was only looking out for me and trying to help me but I realized to have more conviction in my methods and ways since it would be me who would have to take responsibility for the returns!
8. Not enough reflection
These mistakes were not difficult to spot. It did not take much time to reflect. Had I reflected earlier, I would have rectified them earlier and been on the right path sooner rather than later. For someone whose life philosophy is "sooner is better than later" because of the effects of compounding - this was a huge mistake. I also worship Ray Dalio and all he keeps talking is the important of reflecting (pain + reflection = progress) and I still did not do it. Warren Buffet reflects in his letter to shareholders, every single year - I knew that and I knew that every successful investor must reflect. But as we all "know" - "Knowing is not enough, we must apply. Willing is not enough, we must do". Things are much easier to do if they are a habit or part of your routine and hence I decided that I must write one of these posts every single month to reflect and see how I have rectified my mistakes and if I can recognize other mistakes in my work.
Thank you for reading. I would encourage you all to reflect on your work to see how you could have done better. It is really quite powerful and much better if you do it sooner rather than later.
With all this money in my bank account, and given my solid returns in the past, I felt all the more pressure to invest in multi-bagger stocks (knowing that this was not play money anymore). This was real money with the opportunity cost of 12% and I knew I had to give back at least that much after accounting for transaction costs. With this mounting pressure, I did what most college students tend to do - procrastinate. With not enough time as a Junior (with school, and life), I ended up holding about 2/3rd of my money in cash and invested 1/3rd in stocks that I had researched hastily. Now that I reflect, I realize that what I should have done instead would have been to at least 70% of the money in a low-cost ETF (or even a mutual fund would have been worth it) instead of just letting it sit there, making 0%.
2. Feeling good about a business is not enough
The 1/3rd of the money that I invested was concentrated in only two stocks (IIFL and Tourism Finance Corp). I read research reports on both. I read the Tourism Finance Corp report via HDFC securities (my "trusted broker) and I liked the story. I saw a clear-ish catalyst that I thought would work to increase the stock price in the medium term and hence this might be good place to park my money for the time being. The catalyst was that a shake up in management would propel the company to do better than it was doing at the time. The company was also looking to divest to private investors and I "intuitively" felt that this would lead to a stock price increase. But, this was public information - so why was this not baked into the price? Umm, I should have asked that question, right? I missed an important part of evaluating the business - valuation. Is the price I am paying less than the value of the company? The problem is that I still do not know the answer to this question. Probabilistically, the answer could be yes and I could have gotten lucky. So...I still hold the stock until I figure out the value and maybe then I can make the decision to sell. The same thing happened with IIFL. One of the largest shareholders in IIFL is Fairfax and so I decided to read their annual report from 2017 and really bought into their investment thesis. The problem with that investment was that they bought it in 2017! The price in March 2018 was not the same! IIFL could be a great business but there are several great businesses!
3. Not reevaluating stocks in the portfolio
I felt pretty good looking at all of the stocks in my portfolio yielding good returns. So, I held on to them without evaluating them. A lot of those, I should have sold because I then came to realized that the opportunity cost of holding them was too high. I could have also bought more of some of those stocks since they were solid good companies and I would have made more than the 0% that I made on the cash lying around. Since time was a problem, reevaluating companies that I knew well would have been a good way to go.
4. Not betting enough on high conviction stocks
Having heard of the fancy word "diversification" several times, I chose to go that route and invest my money in several different stocks, in several different sectors. Some great, some mediocre (and hence safe). The mediocre stocks gave me mediocre returns. What I should have done instead was bet more on the stocks where I had high conviction after assessing the risk (cases where I would not have lost much if I was wrong). Doing thorough research on one stock (that is worth researching) can be more valuable that researching several stocks only so you can diversify your portfolio.
5. Why on earth did I stop writing?
I was just reading information and making decisions. I was not debating discussing them. In the past, I had done okay because I spent a lot of time debating myself as I prepared content to write my blogs. I continued to write - personally and philosophically because I know for a fact that I personally process information better when I write but I completely stopped writing about investments. When I write about stocks, it is as if I am writing to convince someone else of my thesis and hence I force myself to think from another person's perspective. I am, in a way, telling people that this is where they should put their money - and people work very hard to make money. Hence, I make sure the analysis is thorough, which in turn helps me. So yeah, I should not have stopped writing. My last post was in 2016 - Jesus Christ!
6. Unorganized approach
So, how do I invest? What is my criteria for picking stocks? How do I decide how much to invest? What is my sector allocation? The problem is not that my answers to these questions are incorrect or speculative. The problem is that I do not have an answer to these questions. In the past, I have not been very systematic with my investment approach since I considered it only a hobby and something I was doing to learn versus a serious endeavor. I have now realized that this is something that I am passionate about and need to develop an organized approach to research and mange my portflio.
7. Investors
Sometimes, clients don't know what is best for them. Sometimes, clients are your parents. Everytime I would sit down to do research or invest, my dad (and my biggest investor) would give me his expert advice. The problem with that is that I thought he was must be right only because he is my dad, and he is my "client". Instead of trying to explain to him my philosophy, I just started listening to what he said. He told me to hold for short periods of time and sell as soon as I had made anything north of 15% (regardless of anything). This is fundamentally against my fundamental value investing approach! Of course he was only looking out for me and trying to help me but I realized to have more conviction in my methods and ways since it would be me who would have to take responsibility for the returns!
8. Not enough reflection
These mistakes were not difficult to spot. It did not take much time to reflect. Had I reflected earlier, I would have rectified them earlier and been on the right path sooner rather than later. For someone whose life philosophy is "sooner is better than later" because of the effects of compounding - this was a huge mistake. I also worship Ray Dalio and all he keeps talking is the important of reflecting (pain + reflection = progress) and I still did not do it. Warren Buffet reflects in his letter to shareholders, every single year - I knew that and I knew that every successful investor must reflect. But as we all "know" - "Knowing is not enough, we must apply. Willing is not enough, we must do". Things are much easier to do if they are a habit or part of your routine and hence I decided that I must write one of these posts every single month to reflect and see how I have rectified my mistakes and if I can recognize other mistakes in my work.
Thank you for reading. I would encourage you all to reflect on your work to see how you could have done better. It is really quite powerful and much better if you do it sooner rather than later.
