I have in the last few days come across so many investors who have met with success in the last few years in owning mid caps or small caps.
It’s great to see that so many investment decisions have been duly rewarded and many investors are happy.
however being a keen observer, I have noticed another trait. one which seems ridden with lots of pits and which could undo a lot of gains.
most investors who have been successful have now started taking themselves to be akin to fund managers despite very little experience. the feeling around is they now have the mantra, the secret ingredient that will lead their portfolios to more multi bagger returns through 2016 and beyond. some believe they will do 100 percent for many years running. Even at the cost of sounding childish and over confident.
the following traits were observed:
a) most of these investors have a history of being in the market for not more than 2-3 years. they have never seen a market crash and have thus participated in mid and small caps at a time when the overall small and mid caps have been on a dream run. Sometimes people overlook a trend and take too much credit for it forgetting humility and embracing arrogance and over confidence;
b) most of these investors had nothing to do with investing before this 2-3 year stint. most were in jobs or still are and now feel ripe to be captioned not only as full time investors but “advisors”. Many are thinking of giving up their jobs believing they have a smooth road ahead as super investors quite oblivious of long term trends and impact of market crashes, cracks or reversion to mean. My advise: please don’t sacrifice “certainty” of income in a stupid belief that you are the next hot fund manager or advisor. Remember there are still a handful of the guys at the top and even they are more in tune with the fact that they don’t always beat markets or get more than moderate returns.
c) most of the investors turned advisors never found one idea. They were fortunate to read ideas on many mid caps and small caps through some form of media and assumed that ideas as of their own origin. They forget that “overall” it was a great time for mid caps and small caps and even by historical standards, a dream run in such stocks. The overall lack of ownership in mid caps and large caps and a general high inflow of news from hitherto unknown or undiscovered web sites, blogs or the like has brought in a “flow” of like minded investors or believers into a common pool of ideas. More like group sourcing. When the tap runs dry, many are left thirsty. Learn to dig for water.
d) they believe a lot of the stock upmoves in what they own is their talent or doing-ignoring that in most cases they do not even own 1 percent of the co and do not influence 99% of the owners. They also forget that many of the stocks owned or purchased may have been illiquid and thus even with one or two credible names entering them a mass revolution of buying and believing started. They think discussing stocks on a whatsapp group is enough for its rally and ignore historical data where even the biggest of names have not moved stocks in a one way move. They forget markets are not a voting machine but a weighing machine.
e) there are multiple cases of assumed personality of Columbus now around. It seems what has not gone up is “undiscovered” and many Columbus voyages to discover the next multi bagger are underway. Just because quality companies have run up and become expensive, a flow is extending to usually laggards in a catch up with sector valuations. Sadly a lot is being taken as easy money.
My friends, my role in this article is only to look at history and suggest we all learn from it. Every bull market has some dubious stocks hitting new highs. Most die sooner than one realizes or remembers. Every bull market makes many an investor gullible and over confident and history leaves trails of larger losses than gains- a fact demonstrated in the statistic that less make consistent gains in markets than those who lose money. Try and be in a controlled thoughtful and cautious frame of mind. Be protective rather than careless. The fault lies not in the discipline of investing and sticking to quality or certainty but what is undone in a state of haste, exuberance, hubris and what Nassim Talib calls “fooled by randomness”.
Simple economic theory proves that in a sector there are a few leaders and many laggards. In any profession, some succeed many lag. It’s a known fact that many companies self destruct and very few companies sustain. Something that even prompted a fantastic book BUILD TO LAST by Jim Collins (and its follow on book).
It is completely impossible for all companies to be doing better than a sector average and almost improbable for all companies to sustain growth and valuation above a sector average. Even in economics, we were taught on the law of diminishing returns in a sector as efficiencies set in, economies are utilized and competitive edges of the past give away to a new order of destruction and disruption.
Greed hits not only investors but also promoters and their pursuit of ways to make quick money.
while the market is a fascinating place and there is lots of wealth to be made, don’t lose track of some basics:
- Read Read Read
- Don’t take the market or stocks or returns for granted
- It is almost impossible if anyone tells you he made 100-200% returns to match these returns. Ignore him. He is a passing phase with little or no experience and very little history of success and no experience of sailing in a storm. I would bet many would burn out now in this over confident pursuit of unknown unknowns. Even a good fund manager’s returns are measured over longevity and usually in ability to safeguard the returns in adversity rather than in blind moves. History has examples of IT boom and crash, Realty stocks boom and crash, Infra boom and crash- in each cycle you will see traits of latching on to a rather poor set of companies in this blind belief that another pearl was discovered by a group of quick return investors. Most of whom are now out of the market for good.
Caveat: I am not a SEBI registered consultant. However I have been in the market to have seen and to be aware of several ups and downs and the fact that its imp to sustain.