2020 has been an exceptional year for the market, where we have seen the fastest bear market (last seen in 1987) and unfathomable recovery, all in less than six months! There is probably more to go as volatility is expected to remain high. One should look back and try to find out what best can be learnt from this. Here's what we believe investors should focus on:
Staying calm helps. 95 percent of people panic during adverse times, or when things don’t go as planned. Markets will swing unexpectedly in the short term, with very wide aberrations. That’s an opportunity for long term wealth creators. Being calm is an attribute, which differentiates the men from the boys.
EQ over IQ. Emotional quotient is the most important attribute in investments, rather than Intelligent Quotient (IQ). Market goes in stages from extreme pessimism to over the top exuberance. Holding one's nerves when things don't move as planned is critical. Market will keep testing one's investment hypothesis. That's what EQ is all about and is a major determinant of returns differentiator between investors.
Little knowledge does more harm. Someone wise rightly said, “Conviction can’t be borrowed”. It’s easier to copy investment trades, but very difficult to stick to it. Stay away from tips and suggestions. Do your own research. Learn about the company, promoter, management, sector before putting your hard earned money to work.
Risk management should begin before investing, rather than after. Prevention is better than cure. Same applies in the capital markets. Risk management should be applied before an investment has been done. Factors like quality of business, competency and integrity of management, leverage of company, free float, liquidity, and volatility should be assessed beforehand.
Never forget that no one knows about market movements, I repeat no one! Don’t be foolhardy to believe that markets can be predicted. No one knows where the market will be tomorrow or next month or next year. Anyone tracking markets for more than 30 years, or someone who has fancy degrees, or someone who eats and breathes algorithms - none of them can consistently predict anything. Instead, always focus on earnings and cash flows of your investments, and try to look for opportunities there. Never forget, micros are underrated, but always more pertinent than macros.
Market always looks ahead, never forget that. Markets never look back. Many investors find it difficult to connect the dots with current macro ongoings with market movements. It makes them believe the market is inefficient. Rather, one should never forget that the market always looks ahead and is seldom wrong in the medium or long term.
Best money is made when things go from worse to moderate. Not when everything is hunky dory. Capitalize on the opportunity when everyone is fearful and there is pessimism all around. Those are rare moments when one has the highest margin of safety. That’s where the big money is made!
And last but not the least, Always stick to the investment thesis and asset allocation, irrespective of market movements.
Happy Investing!
(Aishvarya Dadheech is the Fund Manager at Ambit Asset Management.)
Disclaimer: The views and investment tips expressed by investment expert on Moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
