If you do not know the philosophy of your investing, I can assure you, you are doing a bad job. Not because you want to but you are expecting too much from your brain.

Your brain is a bloody lazy organ which does not want to work on a high performance level for too long. It likes you to sleep, eat and not do anything. Investing is a high energy job and it is YOUR job to ensure that you make it simple. So doing a sip is a great step in that direction. Now if you do not want to do a SIP but want to create your own portfolio you need to have a clear investment philosophy (which you can explain to your daughter in class 9 in about 50 words) or in pictures 🙂 .

So can you do that? Can you look at a stock and decide why you are buying it? how it fits into your philosophy? for which goal you are buying?

If you cannot do that, your brain will mislead you. You will read reports by JPM, GS, MS,…and every argument will look so true, and over powering. What you need to answer is “this company which is a start up will fructify after 5 years – so to which goal does it belong?” Can I take so much of risk on that goal? what if the investment turns zero? I need the money after 7 years..what if the company does not go public by then? what if the listing is poor?

If you do not ask these questions it just means you are chasing the best deal in town at that point in time. So when Subra tells you that the Hdfc Ltd warrants are attractive you go and buy them. Did you realize that technically you have a Rs. 1 crore exposure to Hdfc by making that investment? do you want such a big exposure to one Nbfc in the Mortgage market? are you not better off buying Hdfc bank for that amount?

Well if you had a philosophy statement, you will not struggle with such questions. Your questions themselves will be different.

You will stop aiming for that perfect portfolio, perfect asset allocation, perfect timing of a scrip or a fund. You will start asking “is this investment taking me towards my goal” or “why are you recommending an equity stock to me when my goal is just 3 years away”..see how the questions of a ‘Goal based investor’ different from an ordinary investor. It is not as though you will not make mistakes but you could keep the odds in your favor by making it more rule based.

Have you ever wondered why Mark Zuckerberg and Steve Jobs decided to reduce their number of dressing choices? It helps to reduce the number of decisions that the brain has to take. Have you noticed that if some food item (chocolates or savories, does not matter) is easily available you eat more? If you have to walk to the fridge you might consume less. If you had to walk 1000m to a shop to buy it, you may not consume at all?

Similarly putting in place a process allows you to create that artificial distance from getting the ‘tip’ to actually buying the share / mutual fund. Unfortunately our human mind is very limited in its decision making process (hence committees are required for complex decisions). This means if you give more information (Bloomberg) it does not really help a common man who is an investor. In case of institutional investing team it is possible that a full process ensures that some shares will NEVER reach the final committee. You may not be able to create such a robust system, but you can create some simple screens. Like market capitalization, rising Eps or rising dividends, listed on both exchanges, based in Mumbai, a 10 year listing history – create it for yourself and suddenly you will find that some shit does not hit your portfolio, and so you need not hit the roof.

http://www.subramoney.com/2015/09/misinterpreting-investment-strategies/