Developing a proper investing approach is the core of an investor in developing his/her investment strategies.
One of the biggest mistakes that people make in investing is not developing the right kind of approach to investing.
This should happen from the initial learning stage.
Approaches, styles and investment strategies depend on a variety of parameters.
- A difference in investor personalities,
- Varied goals,
- The difference in interests,
- Individual risk appetite,
- Market conditions,
- The skill level of individuals, etc.
If you approach the process with the right attitude, over time, a style and the ability to implement suitable investment strategies will come automatically.
For that, you have to be in practice and should start experimenting with various approaches to find out what best suits your personality and which approach, style or investment strategies will benefit you as an investor.
This doesn’t mean you have to come up with a blueprint to replicate.
It doesn’t need to be.
Consider an Adaptive Approach:
There is no hard set of rules. Not any approach is necessarily right or wrong.
It depends on what works best for you.
No single approach can be exactly defined.
If so one can define the approach, it cannot be maintained as a fixed idea throughout. Because investing works like that.
As so many factors drive the business and the share price, we cannot fix one single approach or any specific investment strategies to follow in a particular investible situation.
Things in the business world keep on changing continuously. No single approach can be followed at all times.
Developing a dynamic approach is what helps you in real time in managing your investments.
Principles, philosophies and market psychology remains same throughout the history and will be in times to come.
Let me put it this way.
John is a farmer. He is planning to plant tomato crop on his farm. Now the season was perfect for him to cultivate.
So he went ahead and purchased the required seeds and planted in his farm.
It’s been a month and the seeds start germinating.
Things are doing pretty well.
Suddenly here comes a challenge. There is a notable pest invasion in his farm. It was unexpected and he was not prepared for that.
Last two years the season and seeds were so good that he neglected the chances of occurrence of any pest invasion.
So what, now the situation is different and he needs to act immediately.
He had some funds but not much to afford for a pesticide. So he thought of an alternative cheaper and organic option.
He went ahead and ‘companion planted’ Marigolds in between.
Days passed by.
Some crops died, but the disease didn’t spread further. Slowly the crops started recovering.
In that season he had only medium to sub-par harvest compared to the previous two years, but he was able to cover the expenses and above all with a decent profit.
When all the neighborhood farmers failed the harvest, John could make decent returns.
Fooled by Randomness:
At good times our thoughts will be surrounded by positive vibes.
More and more we dive deep into the pleasure of vanity, we forget that it’s not something which is permanent. Illusion surrounds rules our projections.
We tend to connect random events with our skills and ability to forecast without considering the luck factor which majorly influences the drive of the actions.
Social emotions create these biases.
The main notion that “This time it is different” surround our thoughts and we forget the history.
Time and again we have to remember only one thing.
‘History repeats itself’.
Agility In adoption:
John has avoided the impact by acting at the right time by developing a plan B.
Though plan B was not part of his strategy, he was able to survive because he understood the reality and the need for a plan B. This may be due to his years of experience in Farming.
But not all farmers would react the same way in spite of years of experience. Like the neighboring farmers.
The past two years of good crop sentiment could have influenced their decision in expectation of a good harvest without any pests.
Our agility to rationally realize the reality is what matters above all the skills we have.
Developing a Fail-Safe System:
We all know the impact of Tsunami on the coastal regions of India, Indonesia, Srilanka, Malaysia, Thailand, Myanmar, etc.
Some of these countries are used to natural calamities.
Often they face challenges.
Also, there are some countries like India which don’t have many comparative serious occurrences with not much safety precautions.
The result, Thousands of life lost.
The one thing to note here is, some of these countries brought in safety measures in the system after the calamity.
This will definitely improve safety and reduce causalities in future, but that depends on the consistency in developing the system and keeping it updated to changes.
Even some of the unaffected countries went one step ahead and made changes voluntarily.
This is where the importance of developing a failsafe system comes.
It may not be exactly failsafe, but they are better off compared to others.
Thinking of rare occurrences near to none is an insane madness. Even after 999 flights safe landed doesn’t mean the 1000th landing will be 100% safe.
Analysis and Decision Paralysis:
To achieve the success you don’t have to be brilliant, you only need to be a little bit wiser than the other guys, on average, for a long time. – Charlie Munger
Investors often times tend to come up with an exact value for a company. Some of these forecasts are too forward-looking and way ahead into the future.
This phenomenon is seen across the community. Whether retail or an institutional investor, they often try to quantify value exactly.
We cannot quantify value completely. It is always sure that you cannot come up with an exact number of the value of a company that you analyze.
Whatever tools you may use. In reality, the value will be different.
And no value is an absolute number.
Investors neglect this fact and strive for perfection.
Mostly it happens due to the lack of experience and our resistance to accepting the obscure nature of investment analysis in an imperfect world.
At times there would be some ego clash between our skills and rational thinking ability.
But what to do?
We have to live with reality.
This may be due to the influence of deep quants and statistical skills in our thought process.
Building Superficial excel models are nice. It does reduce our time and automate some of the analysis processes. Making use of it for organizing our valuation process is brilliant.
But relying completely on that will lead to analysis paralysis
Developing methods should be part of the approach, but relying completely on that is not advisable.
It will have an adverse impact on our thought process.
In investing, you have to continuously accept changes on how you approach your investment strategies.
Overcoming these Paralyses:
After you invest in a company, time and again you have to revisit the analysis and valuation process and update the arrived valuation.
If you could find an excellent undervalued company at a good price and that too having a potential of 5, 10 or even 50 baggers, don’t try to arrive at an exact valuation.
Have some room for revaluation.
Don’t try to fix exact and precise values during initial valuation. This will lead to decision paralysis
In the real world, it may take months or even years for the valuation gap to close.
Doing so will invade your ideas and approaches with biases. Prejudice will start ruling your thought process.
This is where the need for a live report and a post-mortem report comes.
Develop a live report for the companies you currently hold shares and a post-mortem report for every company you invested in the past.
This will help in reducing misconceptions in the future.
Keeping a track of all the corporate actions of the company you invest in, through a live report will help in better understanding the performance of the company.
Post-mortem report helps in assessing your past decisions and aids in improving your future decisions.
Need for a plan B in any circumstance can be identified if you maintain regular investment reports.
Need for Margin of safety:
You have to realize the importance of having some margin of safety in your judgments.
Arriving at the intrinsic value is primary. The level of accuracy should be made by factoring in a margin of safety.
For that, you have to look at other parameters surrounding the business which guides the valuation of the business.
Don’t try to quantify all aspects of the business. This includes the margin of safety.
Try to include the conviction that you develop in the business and the dynamic nature of the market into the margin of safety.
Don’t forget. Nothing can be defined exactly.
You can learn in depth about various investment strategies, styles, and approaches in future articles.
For now, I just want to give a brief note about the various factors you need to consider in developing your investment approach and investment strategies.
Do let me know in the comments section any of the factors that you find useful to consider, that would add new insights to our community.
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