No. 8 DO YOUR HOMEWORK OR HIRE WISE EXPERTS TO HELP YOU

It is easy and sometimes foolish to believe that you can take on the onerous task of ‘doing your homework’. At times it is overwhelming and at times it is boring. The world tells you – investigate before you invest. First see whether you have the competency and time to do it. If yes, study companies to learn what makes them successful.

What are you buying? are you buying assets, or earnings, or earnings growth? For listed companies these are the factors that have influenced price and will do so in the future. Are you buying a regular dividend? Or are you buying future earnings to grow at a clipping pace? Words like Value and Growth can sometimes be confusing. If the earnings are to go up at a good pace, will it be profitable. See Idea Tele – after more than half a decade it is around the issue price. See Mahindra Holiday resorts after a few years on the bourses it is quoting at a small premium to the issue price.

When you bought these shares, I am sure you bought it for growth – hey there is NO profitability. So learn to read all these signals. If you buy Deccan Gold you are not buying earning, you are buying a company which may perhaps sell of the assets – a mine. Ditto for Hindustan Oil Exploration – it is the assets which matter, not the earnings.

 

No. 9 AGGRESSIVELY MONITOR YOUR INVESTMENTS

I would have said ‘aggressively, and actively monitor’ . Change is a constant in the world, and of course in the markets too. Expect, and learn to thrive on the chaos near you. Markets are not permanent – it goes through a bear and a bull phase. Remember you can have a contrarian share doing very well in a bear market and a dud that is performing when the whole market is bearish. There are no shares that you can buy and forget. Managements change – look at the recent tussle in the bluest of blue – Tata group.  The pace of change is difficult to estimate – and WE are talking of world pace, not just one country. Meditate, do not sleep.

Consider, for example, just the 30 companies in the Sensex. From 1979 through 2016, we have seen so many changes. Simply because some of those companies (industries?) were on a decline, a new industry born, some company was acquired, some merged, some just changed business line. Soon you will find life insurance and airline forcing themselves into the sensex. The world is in a constant state of flux. Look at the Forbes list, look at the Fortune list – it is dynamic. Google, Facebook, Amazon own NOTHING in terms of physical assets – and Exxon derives its value from the oil that it owns. Uber owns no taxi, but is a fulfillment company. Remember, no investment is forever.

No.10 DON’T PANIC

I would have said more positively – ‘Stay calm’ . It is difficult, I agree. When the Mistry – Tata spat happened, I sold Tata Steel – and I should not have. Thanks to demonetization, and victory of Donald Trump I could buy back the share, but that is not the question. With 37 years experience, I can still think out of my gut, and my gut is WRONG!

Imagine the market is falling all around you. You hold a lot of banking and NBFC shares. The rupee is demonetized. The market falls 5% and YOUR portfolio falls 13%. What do you do? Sell? or pick up a book and read up on volatility? Stay calm? My foot! You could not sell when the market crashed. What to do?

Don’t rush to sell the next day. The time to sell is (was?) before the crash, not after. Instead, study your portfolio. If you didn’t own these shares at all, would you buy them after the market crash? Remember the endowment effect. You love things which you have. Discount that. Now look at your portfolio. Do you like it? at lower prices? Maybe you would. Do you need the money NOW or after 3 years? or maybe 30?

So are you selling now because you have better shares to buy or because you are scared? If it is the latter, time to meditate. If you seriously think that you have better shares to buy, what are you waiting for?

If you do not, just hold on. Wait a minute. Just add on!!