This post is mostly valid for investors with lesser capital (less than Rs. 1 cr) than bigger/HNI/institutional investors who have other things to worry about. If you are the latter, you can obviously skip this post.
In this 2-year ongoing pandemic, apart from boom in the stock markets, there has been a big boom in these online conferences where investors of all shapes, sizes and interests come and dispense gyaan in all jazz and form. There have been more transcripts of these conferences than what you can read in a lifetime. First thing that you need to do, as a ‘small investor’ (as in lesser capital), is stop attending them.
In this 2-year ongoing pandemic, apart from boom in the stock markets, there has been a big boom in Fintwit (financial market experts – ‘wizards’ they call themselves – on twitter – fondly called fintwit) where everybody and nobody have claimed massive gains given their ‘unique thought process’, ‘clear vision’, ‘in-depth insight into business dynamics’, ‘amazing chart reading ability’ and many other talents with ‘nazar, jigar, sabar’ hints galore (arey bhaiyya, only 2 years have passed!). First thing you need to do, as a ‘small investor’, is to stop reading / taking Fintwit seriously (unless you know the person personally of course).
In this 2-year ongoing pandemic, apart from boom in the stock markets, there has been a big boom in behavioral sciences, biases and books related to them. There is every possible bias that has been documented and hammered with a million examples that you start doubting if you were under some bias or other even while going to the bathroom. First thing you need to do, as a ‘small investor’, is to stop reading these behavioral sciences books and throw every kind of bias in the dustbin.
As a ‘small investor’, the only objective is multiplying your capital. The only way to multiply your capital significantly is to laser-focus on only 2 things and 2 things only – “growth in earnings” and “theme” as a fundamental investor:
a) Figuring out growth in earnings is 80% of the job really. Different ways to do it in terms of understanding business dynamics, management ability to read the market, changing product profile, changing product dynamics, changing competitive dynamics, growth in the overall market etc. Any aspect which is not helping you figure the above is not worth your time. If earnings are going to grow (especially, a business insight you can derive via research/scuttlebutt etc. which will help earnings grow more than what the market has factored in through existing valuations) is what will multiply your capital.
b) Theme is critical for a quicker PE re-rating. There are obviously various kind of themes in terms of marketcaps, sectors, fraud-themes like ESG etc., but the best kind of theme to latch on is where earnings are growing/will potentially grow because that’s when the wealth generated will be more sustainable. You can also make money via these themes like ESG and anti-ESG and what not these days, but the basis of holding on to these stocks becomes increasingly threadbare and therefore, not much money (3x-5x-10x) can be made on larger amounts of capital.
And that’s the summary really – earnings and themes where earnings will grow/are growing – don’t listen to anything else, don’t read anything else, don’t waste time on anything else. Everything else is probably important, but not at the stage of capital you are in. All of that – ‘protection of capital’, ‘playing offense + defense’, ‘understanding every stock that moves’, ‘behavioral sciences’, ‘this bias and that bias’, ‘management culture’, ‘re-investment risk’, ‘FII flows’, ‘DII exits’, ‘only 20-30 stocks expected to have FII flows and hence XXX P/E’, ‘fancy investors buying certain stocks’, ‘float mop’, ‘why 100 PE like coffee-can and not 20PE like tea-can’, ‘kya lagta hai market’ – all of these and many more are useless at smaller capital sizes. You can read “Thinking, Fast and Slow” later in life and espouse endlessly about how beautiful yet complicated our mind is and how many biases exist which blew your mind when you have larger capital (like those speaking at various conferences) – for now, you need to “work hard, think hard, think fast”.
Of course, you can do all of the above as well being a small investor if you want to show-off on Insta/Twitter and show how intelligent and insightful you really are (like many known ‘super narrative’ people), but it’s almost a guarantee if there is one that all of the above will not multiply your capital. To multiply your capital, only 2 things and only 2 things matter and hope that luck/serendipity walks along with you.
P.S: I would not know what to focus as a ‘technical investor’ in terms of charts (other than randomly claiming breakouts and breakdowns for fun), but any advice from @nooreshtech or @prashanth_krish is probably worth its weight in gold
P.P.S: My good friend ‘O’ has a wonderful, visual example to explain all these ‘narrative’ folks that you find these days. Once upon a time, there was a street-rowdy who uses all means to make money – literally all means. That street-rowdy slowly graduates to Sarpanch where he still uses most of the horrible means to make money and then some but slowly starts giving speeches about ‘the good of mankind’. That Sarpanch slowly graduates to become MLA at which point he spouts narratives about GDP per capita, biases, quality, culture of workforce, re-investment risk etc. We need to understand at smaller capital we literally should not have time for narratives or marketers who peddle narratives or that WA/Twitter acquaintance who will give you specious logic which is seemingly intellectually true but that’s not what he does in reality (there are too many in the market!). Don’t confuse marketers with investors.
P.P.P.S: Last one really. As much as I dissed Fintwit above, love so many folks on twitter from whom I learnt a lot, especially after I have known them personally for some time now. As a fundamental investor, @prabhakarkudva and @gordonmax have some amazing threads and blogs which force you to think long and hard (and bloody deep!). If you have found such fellows in your life, what else is required but to ignore my fintwit dissing.