As students of behavioural finance, we know that behavioural traits are a key to Investor return. Equity Investing is a very passionate game which requires a lot of heart, involves a lot of nerves, heart break, regrets which if not negotiated well often leads to sub optimal returns.
The era of concurrent information explosion just amplifies the whole process. While there could be different means to achieve the same mathematical number or convergence of returns as I call, but the basic tenets of investing will outlive humanity, which is Identifying the stock, Sizing the bet, Staying invested & Exit (If need Be)
Let us discuss each of these:
Starting with ,stock identification, this I believe is the easiest amongst the four as one can borrow ideas if one is not able to connect dots. But the other 3 require conviction which cannot be borrowed and hence individual behavioural biases will come into play, which brings us to the 2nd tenet of sizing – how much capital do I back up my idea with?
One might be convinced on Day Zero or the conviction can grow over a period with more confirmation of the original thesis. Some people can bet heavily and some cannot irrespective of the probability to win, ceteris peri bus. One must understand what one is comfortable with. People are born with guts one cannot develop it. So, people will bet differently on the same underlying investment and the results are of course going to be very different if we hit a home run. A 10x return from a 2% allocation will not move the cheese as much – This is mathematical which is understood by all but NOT conceived deep down. The bets we place, will be tested with drawdowns, which is unpleasant but how much perturbed are we, will define our outcome. Restlessness and patience will again define our actionable. This brings us to the art of holding or staying invested while in profits, which is our 3rd tenet.
This is a serious subject as there is a normal tendency to book profits. If we book profits, we cannot have an outsize return as there is a good probability to move from something which is doing well to a dud. Simply put, before becoming a 10x, it has to become 1x and 2x, so let your good bet run as we are aware compounding has 2 elements, longevity and rate of growth. Switching from one company to the other gives a false notion of being right. It’s a mirage. So how long do we hold on? Or are they family silver which you hold into eternity? This brings us to our 4TH and last tenet – EXIT.
Exits should be based on the achievement of the defined objective; the original thesis not holding the ground anymore; a better alternative investment is available since money is finite. EXITS are the most undermined as a concept. Investors cannot
So, to sum it up, one cannot radically change the behaviour pattern but 2nd level thought helps us improve on the odds. We could be lucky to do well consistently without adhering to the tenets discussed. At the end, we need to stay afloat and keep on improving our odds