Part 1 – Facts which are important to consider
Last week before the end of year is always a bit lighter but what really surprised me this time 5 different guys who want to take the plunge full time into public equities spoke/met me in just one week alone. Some are working in startups, others have been doing part time passive investing with a job, some have been investment bankers. All without exception told me that their reason to want to take plunge was their love for equities. But I think this is very importantly due to the fact that small & mid-cap stocks – the kind most of the retail and small guys seem to always bet heavily on – have been on a tear since 2013. If you have not noticed BSE Small cap Index have moved up by almost 6.33x since its lows of 2013 (I think from 3000 levels to current 19000 levels). So while NIFTY and other metrics may look like they have not even doubled – the place most of valuepickr members, budding investors, first time investors and many others have played has itself given a stellar set of numbers. And I am still not aware of many guys who have multiplied their wealth by 6.33x in the same time.
Owing to my experience in the buy side, I can very well assure you that stock picking (basically analysis to come to a conclusion if a particular stock is good first time buy) is just one part of creation of long term wealth success in investing. One often overlooked part is luck. If we draw a contiuum from end to end – with luck being on one side and skill being on the other side – investing will probably fall in the middle or 50th percentile while something like piano playing will be on 100th percentile towards skill and a game of rolling dice on the 0th percentile towards luck – this is important to understand – you can achieve good returns in investing even if you are not good in investing – if helped by dollops of luck.And with BSE Small cap Index movement by 6.33x up – what can be a bigger lucky moment. The problem is that bull market returns make us believe that we are more skilled than we are actually. Infact numerous psychology experiments have proved that in most experiments, as high as 80% think that they are special and are above average. So people who are planning to start afresh should do a double careful evaluation of their skills vs luck contribution especially as indexes like BSE500 breach 35 times P/E – a level previously unheard of.
Coming back to the point being stock picking is just one part of creation of wealth. Once we keep out the luck’s contribution, sustainable long term return creation depends heavily on position sizing, timing, size of entry and exits, subsequent buys and sells, reactions when things go right and most importantly reactions when things go wrong. And post that comes the art of retaining wealth once one is wealthy enough – and believe me that’s hard enough – having seen it first hand in many wealthy families.I see many of the new ones trying to be a full time investor relying on just their stock picking skills. I feel that going to be full time in investing game with just stock picking skills is like going to a ass kicking competition with just one leg. So one more point of caution is that one has to be very sure of one’s risk management, portfolio management and psychology as well as investing rules before you take the plunge. After all when one takes a plunge – you are taking a huge bet on not just yourself but also on your family’s future and well-being – the element of timing as well as sustainability has to be that of a high degree.
Everyone loves to see their portfolio go up by a healthy number every day but believe me seeing your portfolio go down days after day in a bear market is probably one of the most gut-wrenching experience. Only if such a situation stays intact your love for equity investing – then only think about full-time equity investing. However most people like or dislike something based on the success they get on the chosen field – so know if your love will stay intact when the period of loss comes in.Overall tread very cautiously (especially because valuations are at 2017 levels and not 2013 levels) – as Buffett says too many people gamble with what they have and what they need in trying to get things which they actually dont need or really want so much (just as we succumb to greediness when we should be fearful). And that is just anti-rational.
Part 2 – Personal Financial position related view
If you are in the market full time, then a) either you are already rich enough to not bother at all of your monthly expenses or b) you are doing a business of money management where you are earning money from managing other people’s money.apart from creating returns from your money. Warren Buffett would fall in the later category (as he did in his initial years) and most other full time investors I know fall in the former category.
In my opinion if you dont belong to either of these two categories then you are making a mistake to try to be a full time investor in the first place. Even if you think you are a great investor and hence it makes sense for you to be full time, you would have already shown traits of being a good investor, wherein you already have a sizable portfolio and you dont have to bother much about income generation.
Market is not an ATM where you can come anytime and withdraw money for meeting your expenses at your convenience – its an highly opportunistic game where only the fittest and the best make bucket loads of money while most others struggle to even come close to general market returns. In fact most full time investors tend to trade a lot and generate far worse returns than they would have, had they been doing something else. Cause if you are a full time investor sitting a home and desparate for an income, you would do nothing but buy and sell excessively and over time hurt your prospects of even getting a decent return. And if you are not comfortably rich while running full time, you will panic and sell in down markets while also not having any additional money to take advantage of lows.
The problem is the present bull market run has made a lot of people suddenly realize that they are heroes. As Buffett says it is only when the tide will go away will we come to know who was swimming naked. I bet even an uninformed Chimpanzee putting money in mid and small cap Indian stocks would have made 30%+ returns in the past 3-4 years. So I think one needs to take a step back and think of the situation holistically.
