10 steps to making better investment decisions

Dec 27, 2019

In New Year's Resolutions that could take you far, I had written about my intention to experiment with frugality. I also shared about the lessons I drew from my colleagues in London, Chicago and Mumbai.

Remembering the very wise adage “If you don’t know where you are going, you will probably end up somewhere else,” Ravichand of Stock and Ladder decided to pen down his roadmap for his stock market investments. He initially tweeted about it in a thread of around 20 tweets. We have condensed it and reproduced it in slightly more detail.

  1. Don’t underestimate clarity of thought.

Before I invest in any security, I will make an attempt to write down my investing rationale. The lucid articulation of thought will give the necessary clarity as to whether the case for investment is compelling enough. Before you part with your money, have a coherent case as to what it is you are willing to bet on.

I understand that risk is not a random number or a Greek alphabet, but a permanent loss of capital. So I must be clear where my money is going to be invested. No speculation or guesswork as it invariably tends to miss the mark.

  1. Be aware of my Circle of Competence.

This concept was introduced by Warren Buffett in his 1996 shareholder letter.

What an investor needs is the ability to correctly evaluate selected businesses. Note that word “selected”: You don’t have to be an expert on every company, or even many. You only have to be able to evaluate companies within your circle of competence. The size of that circle is not very important; knowing its boundaries, however, is vital.

I will only invest in shares of companies whose business model I can easily understand and are well within my circle of competence. I want to know exactly how the company I invest in makes money, and be aware of the risks it faces.

  1. Always buy with a Margin of Safety.

I generally invest with a long-term orientation of at least a few years. I am quite confident that over the long term, the returns from owning quality businesses are fairly predictable IF they are acquired at reasonable valuations.

I will always insist on a sufficient “Margin of Safety” while making an investment as the return of capital is equally important to me than the return on my capital.

While I speak of reasonable valuation and margin of safety, I am aware that it is foolish to assume one can consistently buy at an absolute low and sell at an absolute high. To assume that I can do it all the time is foolish and futile.

  1. I will practice patience.

I will rigorously study and analyze companies to find good businesses to invest at attractive valuations. In case I don’t get either, I will have no qualms about let my money remain in the bank. But I will not invest for the sake of investing. I shall stick to my process.

  1. Be aware of the mob mentality.

Just because there are a fair number of buy calls from sell side analysts, I will not succumb without having done my own research. To pursue an independent line of thinking while analyzing businesses, I will commit to reading more annual reports than analyst reports. Or, at least read the latter only after I have analyzed the former.

In a similar vein, I shall reduce time spent watching financial news on television, and instead increase my reading. I shall try to read at least one financial book a month.

  1. I won’t be embarrassed about my mistakes.

Mistakes are great teachers. I will learn a lesson from every single mistake of the past and the future. In fact, I shall go one step ahead and learn from the mistakes of others.

I am reminded of the witty quote: You must learn from the mistakes of others. You will never live long enough to make them all yourself.

Not to mention, that in the financial space, it is a lot cheaper.

  1. I will up my savings game.

The only way I can continually increase my investing capital is by spending “what is left after saving” rather than saving “what is left after spending”.

  1. I won’t give in to behavioural biases.

Just as I don’t check the price of my house every other day, I will refrain from checking the worth of my portfolio daily. Short-term movements are a reflection of the whims and fancies of thousands of participants reacting to information / misinformation.

I will not fall prey to greed, which means ignoring get-rich-quick schemes and stock tips, as successful investing needs time for the power of compounding to work its magic.

When I tend to panic, I will remind myself of the cardinal principle of reversion to mean as well as the story of cycles in the stock market because a bull market will follow a bear market, which will be followed by another bull market.

  1. I will control my environment.

I will choose my investing role models and friends wisely. Because the people I hang out with or look up to has a significant impact on the type of investor I will eventually turn out to be.

I will strive hard to increase my circle of competence by gaining proficiency in one additional area every year. A larger circle of competence widens the areas from where I can search for profitable investing ideas.

I will eat healthily, exercise regularly and sleep soundly as I understand a healthy body is necessary for sound investment decision making.

  1. Be a giver.

Just as a fisherman puts a small part of the daily catch back into the sea as a token of thanks, I will give back to society at least a small part of what I make from the stock market as an acknowledgement of gratefulness.

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Pratik Bharadwaj
Dec 29 2019 03:09 AM
Really amazing article. Thank you for posting.
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