Making investments in haste can make you repent at leisure. So, as a smart investor, what should you do? Well, to begin with never lose sight of three important investment lessons. Here they are:
1. A good investment strategy takes time to play out
Jim Rogers once said in an interview: ‘’I’ve always been accurate but early. If I’m convinced something is going to happen or if I should make an investment, I have learned that I should wait for a while, because maybe it is too early. And it usually is too early.’’
What investors forget is that a good investment strategy takes time to play out. And also that, unfortunately, no one can predict that timeline for you. Making the process of waiting even more challenging.
Knowing that there are several stocks that took many years to multiply might urge you to be patient. As truth be told, most multi-baggers take years before they soar.
Imagine if Rakesh Jhunjhunwala had sold Titan Ltd. after 3-4 years of investing in it. He had bought in 2002-2003 at around Rs.2-3.
Source: Google Finance
Now I am not condoning you wait several years for every stock to perform. Or that every stock will outperform over such long periods of time. But if you have a strong conviction, backed by fundamental research, that is good enough reason to give time to the stock to realise its full potential.
Initially, multi-baggers tend to go unnoticed, staying out of everyone's radar for years. And sometimes that is what makes them value buys. As only some see the real value which others don't. So if you have identified a multi-bagger, sadly, it also means that you early, making patience your most important virtue as an investor.
2. But this strategy, this value find does not appear out of thin air
You have to work towards it as there is a lot of research that goes into it identifying a multi-bagger.
Look at any of the successful investors, Peter Lynch, Warren Buffet, Jim Rogers. What do they all have in common? What is the one thing they all preach? DO YOUR RESEARCH before buying a stock. And they aren't wrong. They practice what they preach and have made their fortunes only by investing diligently and following a simple research process. None of them has gambled away their money on tips and recommendations by friends. Sure they have considered them but followed it up by conducting their research, making informed decisions.
Be mindful, that only research can help you identify the economic moats, the catalysts. All of which are required for a stock to soar and achieve the status of a multi-bagger.
But don't let the research process intimidate you. It is a simple process, especially in these times. As everyone is privy to all the information on a company. There are several online tools at your disposal, simplifying the process further. Just cut through the clutter and analyse the available information.
Stick to investing in companies whose businesses you understand. Focus on their earnings prospects as the value of a company is determined by its future earnings and assets. Ask the right questions, where is the growth coming from? When can it possibly slow down? What are the main risks that affect its business? Mainly as different companies are at different stages of growth. The key is to recognise that and work solely towards assessing its future value.
3. Timing the markets is futile
Timing the markets is a sheer waste of your time.
“We wish we had perfect market timing (as well as the ability to fly). The reality is that no one does or ever will.’’ - Seth Klarman
“After nearly 50 years in this business, I do not know of anybody who has [timed the market] successfully. I don't even know of anybody who knows anybody who has done it.’’ - Jack Bogle
“In my experience, most people who are lucky enough to sell something before it goes down get so busy patting themselves on the back they forget to buy it back.’’ - Howard Marks
I can quote many many many more successful investors on this. As the verdict is pretty much one-sided, that timing the markets is futile.
A simple experiment was conducted by some reputable researchers to prove the same. They tracked down the value of an investment made at the ‘best possible time’ and at the 'worst possible time' every year. Oddly, the results were not very different. The value of the investment made at the worse possible time was a staggering 80% of the value of the investment made at the 'best possible time'. Thereby proving that not only can you not pick the perfect day to invest, but also there isn’t a whole lot of upside from achieving that. Therefore you are better off putting all that time and effort into finding the right stock other than trying to time the market.