Investing is simple but not easy. We all know if we invest in stocks of companies which regularly make money, have increasing market shares, a decent competitive advantage etc., it will end up making a good amount of money for us in most cases. But most people still find it difficult to do. You might find it weird but a big reason behind this is that most people are now well-educated, intelligent and independent thinkers. They can think about themselves and their families, the good and the bad that they and their families might have to face in different situations. When we see our stocks’ prices going down quickly, it starts a wave of panic and overthinking.
While regular or periodical tracking of our portfolio is not a completely wrong thing to do, it is not for everyone. It is not for most people. Someone once jokingly said to me, “Earlier I used to live without any worries, but last week 1 bought some stocks, now I’m worried about inflation, the war in Ukraine, rising fuel prices and even US fed chairman’s commentary on interest rates.” This is a very common phenomenon, most people unknowingly try to turn into analysts or economists once they start investing in stocks. If you still want a regular tracking/reshuffling of your investments, then it is better to go with mutual funds, where professional fund managers can do it in exchange for a small fee.
But what we need to understand is being an investor is very different from being a specialist in analysing stocks or the economy. Success in investing needs a completely different set of skills as compared to skills needed for success as an economist. An investor needs just the combination of two things:
1. Extreme Patience
2. The ability to manage his/her emotions
3. Or just simply being lazy or ignorant
Yes, being lazy is actually a very helpful quality for being in stocks. During a TV interview around Diwali, One of India’s most popular fund managers was asked which godly figure should be an inspiration for long-term investors. His answer surprised even the anchor. He said Kumbhkaran should be everyone’s inspiration. If you don’t know, Kumbhkaran was a character in the Indian history epic story of Ramayana. He is the brother of the lead negative character, Ravana and all he does is sleep and eat. He wakes up to eat and then goes to sleep for 6 months, or sometimes more. That fund manager said every investor should be like Kumbhkaran. We should buy stocks and go to sleep for 20 years (or in other words, forget about them). He put in it an amusing way but he also meant it. A good thing about being lazy is it’s not difficult. Having extreme patience and the ability to manage emotions is a difficult task. One needs to either have these skills by birth or if not, then practice them both. But being lazy and not acting quickly is both easy and useful in stocks. Reacting quickly does not necessarily lead to fruitful results while investing.
Ignorance is a bliss
Wipro was started as an edible oil company in Amalner, a small village in Maharashtra, India by M.H. Hasham Premji. Later, Ajim Premji took over the reins of the company from his father and transformed it into an IT company. But in early 1970, when Wipro came up with its IPO, it was not fully subscribed. Investors didn’t believe in the company’s theme. So, people in Amalner, most out of respect for Hasham Premji and Ajim Premji, put some of their money into the stock to subscribe to the issue. Shantilal Jain, an employee in Wipro’s Amalner factory, bought one share of the face value of Rs. 100. The stock price later fell to below Rs. 40 and while most people didn’t want to touch the stock at that time, people of Amalner didn’t care. It was just an expense for them. Most people didn’t even consider the fact that it was a valuable investment for them. The stock of Wipro split many times in the years to come and eventually, in 2016, Shantilal Jain’s investment of Rs.100 became worth Rs.5 cr. Approx.
We can counter this story by saying it was merely a stroke of good luck, which might also be true. But even if it were, seeing a stock go 500000x can only be done by not looking at the prices again and again. Most people, even smart people or especially smart people do not have the extreme patience needed to achieve such a feat. Because in this journey of 46 years from 1970 to 2016, there would have been countless crashes, recessions, many times the stock would have gone down more than 50% etc. If Shantilal Jain would have noticed all these ups and downs and periods of panic and FOMO, chances are he would have exited at some point.
For eg. Before growing to this worth around Rs. 5 cr., the stock would’ve also first touched a value of Rs.50 lacs at some point. Even at that level, the return was an astonishing 50000x. Any decent or smart investor would definitely consider the possibility of booking the profits and looking for another early-stage Wipro at this point. But because Shantilal Jain avoided all the hard work of calculating net returns, exiting Wipro and then looking/researching, trying to find another multi-bagger opportunity, he simply didn’t notice what was happening. He was lazy enough to not care about the stock price movements. And eventually, the stock grew 10x even from the 50 lakhs worth.
Peter Lynch has put it correctly, saying, “Everyone has the brain power to make money in stocks, not everyone has the stomach.” If we keep looking at the stock prices and they go up by say, 2X, we might fear losing all profit in case of a sudden fall or crash in the market. Now we have a choice of booking profits in at least half of the position to make the other half free or to book profits in the complete profits to find another good investment. The problem with this thinking is that it might actually turn out to be right and if we don’t follow our brain and take some action, we might regret it later. But this thinking will never let us wait for our stocks to become 50x or 100x for example.
Jim Grant says “Progress is cumulative in science and engineering but cyclical in finance”. We know stocks do not move upwards in a straight line. Just imagine if your stock goes up by 10x and then suddenly starts falling because of a sudden crash in the market and ends up going down by 50%. Now, your intelligent and calculative brain might think the stock is down from the top but it is still 5X my investment and the way markets are going down, it is better to get out of it before any further hit to the returns. The fear of losing it all is a big fear for most people. If you can stay untouched and unaffected by this emotion in such a situation, kudos to you for being a brilliant investor but again, the problem is that the fear might turn out to be true!
Most investors will exit their investments in such a situation. This means that it is very difficult to get huge returns in stocks by using your brain. I think of a different approach to tackle this problem. Consider investing as an expense. Like once you put your money in a stock, it is gone, there is no way it’ll be out of it. Think of it like a child, on whom you have been spending taking care of his/her education, healthcare, bringing toys and stuff for him/her etc. expecting nothing in return. But we can only consider investing as an expense in 2 cases:
1. If the amount of investment is small
2. If we have a surplus that we don’t need in the future
Investing in small amounts gives us a huge possibility. Small amounts of investments are essentially useful for two important reasons:
1. They help us buy more every time the market gives us an opportunity
2. They let us not panic as the amount is small
Here’s a suggestion, whenever you have a small amount of spare money, buy some stocks, even if it’s just 1 or 2 stocks and consider it an expense. Like if you had planned a movie with your family and the plan gets cancelled, you can put that money into some stocks. Important to note one thing, DO NOT EXPECT ANYTHING FROM THIS MONEY. Considering these investments as expenses means only this. By doing this, you are giving yourself a chance of turning yourself into a possibility just like Shantilal Jain. As we discussed earlier, even if it’s plain luck, good luck can only happen to us if we give it a chance to happen!!
Let me tell you the story of my friend’s father, who started a Titan franchisee in the early 1980s when the company was in its initial stages. They invested a handsome amount of money to buy a place for opening the store, develop the infrastructure and purchased stock for the store etc. His accountant was a wise man and he gave a piece of advice to the owner of the store, “Sir when you are investing all this money in starting this store, incurring a lot of expense, I think you should also spend some money on buying the stocks of this company. Just consider it an expense. While this store can give you a good income, the stocks might help you build some wealth. The owner valued his advice and bought some stocks of titan. In a few years, the store was doing decently fine but he had to close it as he was getting old to handle the business and his only son preferred taking a nice paying corporate job. Some time back, they got a letter from the company, informing them the shares will be split in the near future. They checked the current value of those stocks and they turned out to be around Rs. 10 cr.
So, we have two filters which our money needs to pass in order to become a long-term slave to us. Once we finalize an amount that can pass these filters according to our current financial situation, make sure you put follow this approach wholeheartedly. You can open a separate investment account for this type of investment. One where when you put this money, you don’t look at it again, you don’t keep a track of this portfolio, you don’t think of making adjustments or doing anything that might be smart or intelligent to do, no matter what the situation of the economy or stock market is. Over time, you will realize that the surplus that you have built up through this process will amaze you beyond your wildest expectations. DO NOT TOUCH THIS MONEY ONCE IT IS INVESTED THROUGH THIS ACCOUNT.