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Investing Lessons from Professional Investors

Mar-29-2022


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Thanks to Zerodha and many other low-cost fintech brokerages, investing in stocks has never been easier. Further, social media-frenzied millennials are grabbing the opportunity of investing in stocks with both hands. Why not, quite a few of our known peers or family members have made lots of money on stock markets over the last year.;

Over the last few months, I had quite a few such conversations with friends considering to go full-time traders or investing money for overnight gains. I can empathize with such thoughts as I have considered doing the same thing during the major bull run of 2007. I made quite a few mistakes as a novice investor those days. During bull markets, I suppose we all get carried away with our success, attributing it to our superior qualities when, in reality, it's just the market cycle.

Fortunately, I also got the opportunity to work for a professional fund management firm, where I gained insight into how professional private investors think about investing. I attempted to describe my important takeaways in the hopes of assisting novice investors.

Repeatability

Investing is a game of odds. The outcome of the investment can also be driven by sheer luck. However, sheer luck cannot be replicated again and again. Therefore, such investment successes are often short-lived.
The success of investment professionals is driven by the ability of the team to replicate and execute successful strategies, again and again, to keep delivering superior returns to the investors over the long term.
 

Stick to your area of competence

Investment opportunities are abundant, virtually every day, we receive a new stock tip persuading us that this is a fantastic opportunity. Sometimes opportunities are tempting too, especially when an industry is hot and every other fellow investor is making a killing with their investment in the sector.  Fear of missing out creeps into most investors at some point.
Moving out of our area of competence is a recipe for disaster. Most of us as individual investors have limited ability and bandwidth to research and develop expertise on each sector/business model, therefore, we do better if we stick to our area of expertise to invest for superior returns. Even professional private market investors typically stick to their core area of expertise, which increases their chances of success.
 

Always stick to your Investment Strategy at all times

An investing strategy is a set of rules, behaviours, or procedures that a person uses to help them choose an investment portfolio.
In the stock market, there are many distinct types of investors with various investment goals. Such each investor should have a plan to achieve the objectives. Some invest for overnight gains, few who flip stocks every few weeks/months and on the other end of the spectrum some investors stay invested for decades.
There is no such thing as a right or bad approach; each group of investors has its own style of working and producing money. However, knowing your approach is critical; else, there will be constant diversions.
The goal of the Investment Strategy is to help you stay on top of your game and play to your strengths in order to improve your results. While such methods may evolve over time, recognizing and sticking to your approach is crucial to reaching your investment goals.
 

Diversify your bets

Legendary investors have made and lost money in the markets on numerous occasions throughout history. I would advise all new investors to read Michael Batnick's book "Big Mistakes," which chronicles renowned investors' spectacular mistakes.
Many famous investors have been unable to forecast stock market fluctuations. We're being naive if we think we can do better.
Diversification is the only certain approach to limit unknown risks in investing. Diversification can be done by allocating money to several asset classes and multiple assets within each asset class. Your asset allocation should include a mix of fixed income, equity, and alternative assets to reduce risk while increasing total returns on your portfolio.
We are in uncharted territory, with low-interest rates, rapid inflation, stock markets at all-time highs, and government debt at all-time highs (lowest ability to support in case of any new economic disasters). This is the time to boost your allocation to alternative investments to maximize your return.
 

Stay the course, don’t get distracted

Investors in the public markets are constantly presented with new opportunities to invest, as well as temptations to replace recently underperforming companies with hot ones. Investors are sometimes tempted to flip fundamentally sound stocks in pursuit of short-term returns. Which has the potential to be value-destructive.
Private market investors, on the other hand, generally do not have the option of flipping their investment and are not tracked by markets on a monthly relative performance basis. This allows the fund's investment manager to focus on the fund's long-term investment strategy rather than short-term performance. Private investors have been able to beat public market investors on a gross level as a result of this, while net returns after fees may or may not justify allocation to private investors. However, the ability to keep on track without being distracted helps to produce superior long-term results.

 

If you find the information presented above to be helpful in enhancing your investment skills, To assist other inexperienced investors, please comment, and share.

 

Author: Ravinder Voomidisingh

 

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