Even Sanjoy Bhattacharya, a media-shy master at investing, has once made the mistake of buying significantly into a compelling narrative without doing the necessary checks.
By sheer luck, the mistake didn't burn him.
As Safir Anand, author of the soon-to-be published book Confessions of Stock Market Wizards, writes, it was an example of "a lucky fluke where every action leading to the outcome was incorrect, but the result defied all odds!" Bhattacharya is Partner at Fortuna Capital and was formerly the Chief Investment Officer at HDFC Asset Management Company.
What was the stock?
Bhattacharya was a day older than 37, in June 1997, when he heard from a friend that cycles were toppling over each other behind the friend's office, from the number of students queuing up to learn coding in JAVA from Chennai-based SSI.
Anand writes in his book, "Having vividly grasped the huge demand for their classes. Sanjoy lost no time in buying the stock." Bhattacharya didn't feel the need to do any homework or do any background checks, given the "compelling narrative".
Also, to make sure that the investment made an impact on his portfolio returns, Bhattacharya "put a fair amount of money to work".
Unexpectedly, the stock multiplied more than 500x by February 2000 because it was on the K-10 shortlist. K-10 stocks are a reference to the stocks that the infamous market operator Ketan Parekh manipulated between 1999 and 2001.
Thankfully, Bhattacharya's cautious approach to investing sent out alarm bells. As the book says, he was "scared silly by its (the stock's vertical) ascent and felt things were too good to be true". He exited the stock with a sign of relief.
Bhattacharya is aware that he will make mistakes, but he tries to minimise their impact. As he says later in the book, just as gains compound on the upside, losses compound on the downside.
He says, "I have learnt to limit the damange as I make the mistakes. It is not that I do not make them, I do not wait for them to compound."
Bhattacharya also cites his inability to take big bets as a mistake he commits often. He says this mindset is embedded in him "fundamentally and psychologically". "I may be financially better off than I was before, but my mind still works like that of a guy who comes from a very humble and modest background. Overcoming that mindset, is not easy," he tells the author.
On what he believes in, Bhattacharya lists the primacy of a resilient balance sheet and rational capital allocation, as opposed to earnings growth and intricate tapestry of forecasts.
Lessons from Bhattacharya
Towards the end of the chapter, Anand lists Bhattacharya's lessons for readers to avoid mistakes. Here are some of them
*Don't undermine luck, but try and develop a good process that combines effort, objectivity and a lack of ego.
*Avoid studying extreme examples, focus on commonplace and frequently repeated patterns of success and failure.
* Accept what you don't know, avoid the myth of forecasting.
In the book, Anand has compiled lessons after interviewing 26 veterans, who spoke about their mistakes and their learnings from committing them.
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