Revitalize Finance

I have been actively into markets since 2015. It is 2021 and I have learnt a lot from my pursuit into the world of investments. I have come a long way and I wanted to share my learnings with everyone who is interested in learning about how the markets work. Also please note this duration of 6 years is marked by exceptional bull runs and exceptional conditions like a global pandemic which make this a very dynamic and incomplete experience for an investor like me. Take this with a pinch of salt as your experience maybe different than mine because the personality characteristics of a person play a central role in how you fare in the markets. I will go point wise to explain all my learnings and please feel free to share your views in the comments. Let’s begin.

Your personality predicts your success

Stock markets are definitely not for the faint hearted. If you like to see only profits and loose your cool when you face losses than markets aren’t for you. Stock markets are extremely rewarding for a person who seeks to understand the markets. You have to be patient, logical, humble and arrogant at the same time to understand the markets. Patience is important as you may analyse multiple stocks and choose specific stocks for investment and wait for them to increase in value. It can so happen that the stocks you choose may not move at all or go down as well. The problem may not be in your analysis but in the market’s perception of the company. This can cause a loss of opportunity in other stocks which are at the centre of attention of other investors. When I say logical that means not getting swayed by what the market is doing. Detach yourself from what the market is saying. Market maybe recording its best run but the fundamentals may not be there. At this point making reasonable assumptions is important because this will become a basis for your investment. If you seek to update your view just because your assumptions and market’s assumptions differ will open you upto a big gamble where you become reliant on what markets think and plan your investments on the basis of their assumptions. Now don’t get me wrong you can do this and still win but it will bring you in the realm of momentum trading and speculation. You should be humble enough to accept that you are a human and market is a human machine and that both can go wrong. Be humble enough to accept that your analysis will be wrong and keep searching for where you can go wrong. In terms of being an arrogant, don’t take this the wrong way because you will also not be wrong several times. Also staying open to difference in opinion is important as market is a place of opinions and forecasts, this will help you know where you have gone wrong and also validate your analysis.

There’s no easy way to make money

There is no get rich quick scheme in this world. Stock markets are a place where there is a transfer of wealth from the impatient to the patient as per Benjamin Graham the father of value investing. Things like crypto and Tesla frenzy are driven by an excessive and extreme level of optimism. Looking at the valuations of Tesla itself tells you how logical the market is( getting the sarcasm?). I have nothing to say for crypto as I can’t find any fundamental basis on which the value of the crypto currencies can be based. There are no cash flows or real world usage. Lot of usage has been created because the crypto itself went up in value(cryptocurrency has existed since 2012 and nobody saw its usage until it made them a millionaire by luck) . It is just like internet bubble. These frenzies are like quick rich schemes. Don’t get me wrong here, the underlying technology of blockchain is amazing but the currency itself doesn’t hold any value at the moment. As soon as the tide turns it becomes ugly and lot of companies and individuals go bankrupt. If you can successfully value an asset then you know what you are doing but it requires research and dedication. Cryptos and Tesla require non of it as there is no fundamental basis left(Note: In Tesla’s case the valuation according to me is way above and represents a bubble so the fundamentals and stock price have become detached). The only technique one can find in valuing a crytocurrency is the market cap formula. I will cover more about it in future articles. Even when investing in stocks, you open up yourself to a lot of risk and not every company is the same. Relative valuation models may suggest similar pricing but it is not necessary two companies involved in same industry with same business model will be the same. There are too many minute differences in the companies which make them completely different. The more easier the opportunity to make money the more you should be asking what am I missing in my analysis especially in financial markets.

Market is a human machine

Often in our finance courses or economics courses we come across the fact that the market is objective. For the most part it is but at the same time it makes big mistakes. Most of the stocks maybe fairly valued but at the same time there will be a sizeable amount of stocks like Tesla just riding hope rallies. Think dotcom bust. It is the human activity that decides the pricing and volume of the financial assets and not some scientific theory. Correlations are formed from opinions and perceptions of financial assets. They are not objective and are more of subjective than the economic theories might suggest. Stocks get rigged, insider trading takes place and accounting frauds are made and those invested in such assets suffer. That time all objectivity goes out the window. Always look at market as an opinion of people expressed in prices. Whatever the asset class, whether a bond, mortgage backed security or gold, everything is dependent on opinions of people.

Diversification vs Concentration

If you are a Buffett disciple, you most likely know what I am about to say. If you follow the modern theories of portfolio management you are most likely to believe in diversification. I support both the theories but if you are an advanced investor who is into markets or wants to be in markets, diversification doesn’t make sense. Warren Buffett manages a stock portfolio in hundreds of billions of dollars and still goes on building sizeable positions which can constitute upto 40%(note: he doesn’t have any defined number, the number may keep changing) of his portfolio. At some intervals of time, he has held only three stocks or sometimes more than 10. It is on the basis of opportunity. Most importantly, not every company is as good as a top company. Not every management is top end. Not every industry is worth investing(by that I mean for long term). Even stock markets have their pyramids. It is just like your school or university, not every student is a topper. So diversification may also inevitably lead to picking up poor assets despite you knowing about it, just because theory of modern portfolio requires you to diversify. It would be absurd for us to ask Jeff Bezos or Elon Musk or Mukesh Ambani to sell their holdings in their companies for the sake of diversification. Also you have to keep in mind they are entrepreneurs more than financial investors. Same way, I believe one should concentrate their holdings in top companies that you like and know about. This would also not mean betting your entire savings on one single stock. Choose high quality stocks. Not necessarily large cap or mid cap or small cap. You have to be insanely sure about your analysis. Now for those who can’t do all the research and work, diversification makes sense and choosing superior fund managers will definitely help.

Smart money vs Dumb Money

Either you can be smart and do all the research or play dumb where you buy on tips based on where the wind is blowing in the market. Like I said, market is made up of humans and maximum assets you touch will not be gold so that opens you upto a risk where you will make good money but at the same time sometimes the probability of high risk will come true and you will loose it all. This happens very often and you won’t see it coming and this is the reason you need to keep asking yourself where you can wrong. Your job is to protect your money and see it grow and make sure you don’t loose it all.

-Shivang Agrawal at WordPress