7 Habits of Highly Effective Investors
Introduction
I was a trader for a very long time. Then a friend of mine introduced me to the concept of value investing and goal-based financial planning.
Over the years, I have been studying successful investors and there were a few things I found similar.
So, let’s talk about the 7 habits of highly successful investors.
Habit 1 – Successful investors are Opportunistic and prepared
Whenever we hear of opportunists, we generally term them as negative and no one likes them. If you see an office colleague as opportunistic, the chances are you won’t have a great opinion about him or her because opportunistic people are always trying to take opportunities away from those who deserve them and that they use unfair practices.
However, in the world of investing, being an opportunist is not only desirable but also required because it is not unfair and you are not competing with anyone.
You need to be able to spot the opportunities when they present themselves and jump on them because opportunities can come at any time.
One fine day, Maggi noodles may be found with high levels of toxins and because of that, the stock of one of the biggest FMCG companies around the world becomes available at bargain prices. OR
The CEO of one of the biggest private sector banks can be found engaging in unfair lending practices and the stock of the company can be found at rock bottom prices. Or of course
The world can be dealing with a pandemic of historic proportions and you get the whole market at a fire sale like there is no tomorrow.
Opportunities come to us all the time but just being opportunistic is not enough, you also need to be prepared for that.
Last year, for example, I made a video of a profit of Rs.1 crore. ( https://youtu.be/POJUyh8Th9o) Most of the stocks were good quality stocks and this is the power of being opportunistic & prepared.
So that means you should have the capital and preparedness or willingness to take the decision and invest when the whole bunch of investors are pessimistic.
Habit 2 – Successful investors understand the soul of the investment
Let me ask you a question – why do we buy gold?
Most of us would say we buy it for making money. No, that’s not true, because who has ever sold gold because it came down 20%? Have you ever seen anyone?
But why? I bet even if Gold goes down 50% you will not sell, I can guarantee you that, but why?
If the investment is done for making money and it is losing money, shouldn’t we logically sell?
See, what we need to understand is that every investment has a body and a soul. The body is, of course, what we see from the outside, the price and soul is the real value we see in that investment.
The reason is that we see something else in gold apart from the price. We see emotional security and believe in its ability to hold its value even if the economy is not doing well.
Similarly, when successful investors invest in a stock, they are not investing in that stock, they are investing in the soul of the stock and the soul of a stock is its business.
These are real businesses that are offering products or services that people are willing to pay for. So, if the business is solid, the price will eventually reflect in its stock.
Imagine that immediately after buying a stock of TCS, it starts declining rapidly, but you know that the company is still solid about its fundamentals. According to Warren Buffet, we should buy a stock on the presumption that the stock market will be closed for the next 10 years. What he means is that we should pick a stock based on the company’s strength, buy it and forget it.
That is the kind of understanding and confidence we need to have in our investments and that can only come if we spend that kind of time and effort as these successful investors are known to.
Habit 3 – Diversify intelligently
What is diversification? It means that you are putting your eggs in several baskets and so, instead of just investing in IT stocks, you also invest in Pharma, Banking, Metals, FMCG, etc. because diversification acts as insurance. So, if you put all your money in one stock or sector and something goes wrong, you are doomed.
On the other hand, diversification, just like salt in our food, is only good when it is done at the right level – too little will render the food tasteless and too much will make the food inedible.
In the same way, too little diversification can increase your risk substantially and on the other hand, too much diversification can compromise your long-term returns.
This is important to understand because there are people who don’t know where to find the right balance. Some people are blindly buying hundreds of stocks and mutual funds whereas some have put all their money in just a couple of them.
Successful investors have a simple rule of thumb – The level of diversification should be directly proportional to your knowledge.
If you don’t have any knowledge, diversify very well, buy mutual funds, index funds, stocks from various sectors. However, as your knowledge level starts to go up, your level of understanding about the business of the companies start to go up, you can move slowly from diversification to concentrate on a particular stock or a group of stocks. So, diversify intelligently.
Habit 4 – Right kind of patience
Everybody says “if you want to make money in the long run, you have to be patient in the stock market” and we all have heard this advice.
But tell that to millions of investors whose portfolios are down by 60, 70, 80%. They were all patient. Investors of Yes bank were very patient, yet, what happened to them? Investors of Idea, Punjab National Bank, DHFL, PC Jewellers were very patient and I can give you thousands of examples where patience turned out to be a bad idea. I am sure a lot of you watching this video must have experienced this first hand as well.
What we need to understand is that patience is a virtue only if it is applied in the right place. So, we need to be clear about what to be patient with?
Successful investors are patient with stock prices but impatient with the business.
Let’s break this down. Patience with price means successful investors are patient to see that the stock prices come down to a reasonable valuation before they invest. After the investment, they do not worry too much about the stock fluctuation.
Remember, I talked about the soul of the stock is in the business? This is not what they are patient with, i.e. the investment in the business. They are impatient when the company is not performing as per the expectations of the investor and the market.
There is always noise and there are signals and successful investors develop a knack for differentiating between the two.
Habit 5 –Successful investors ride their winners
Let’s say you have 2 stocks in your portfolio; One is giving a profit of 200% and the other one is giving a loss of 20%. Which of them are you likely to sell first?
I will tell you what most of us would do. They will sell the stock with 200% first and hold the second one. They always sell their profitable ones and hold their loss-making stocks for a bit longer and with a lot of patience.
I will use my example here. Last year, I bought several stocks and 2 of them were Adani Enterprises and RBL bank. Adani went up 400% from my purchase price and RBL is barely 10% up. Which of them do you think I am holding right now?
In contrast, I also bought RBL bank, which I am still holding by the way.
Why? Why exit a good stock and hold on to a non-performing stock? It all boils down to our psychology.
Warren Buffett has been known for holding all these companies for several decades.
Rakesh Jhunjhunwala has been holding the shares of Titan, Lupin, Escorts forever, even though Titan’s share price fell over 50% twice.
What do these guys know that we don’t? Well, they know that when something is working, do not mess with it. Good businesses tend to do better with time and the biggest money is made when we just sit back and let the stock ride along with these businesses.
But we tend to be a little over smart and look at a winner and say that the stock has gone up 200% and let me book my profit now. We also think of entering again when it falls.
Well, the truth is that we never get a chance to enter and so, the next time you are getting the temptation to book your profits, ask yourself- why am I punishing the winners by kicking them out? Shouldn’t I be kicking my losers out?
Habit 6 – Stomach for volatility
Successful investors play the long game and that means the ability to sit through the roller-coaster ride of the stock market. If the market goes up, we become happy and if it goes down, we get scared whereas successful investors are aware of the market gyrations.
Now, most of us are not comfortable with the stock market volatility.
Charlie Munger, Warren Buffett’s partner, acknowledged that both he and Warren Buffett had been pretty average in terms of their success rate but what differentiated them from the rest was the ability to just sit tight and not sell any investment just when the market went down.
Similarly, in India, Rakesh Jhunjhunwala, Radhakishan Damani sit tight and hold on to their investments even if the prices went down. We have also seen in the news stories that in 3 days Jhujhunwala lost 100 crores and we start to wonder. However, they don’t care because they have a strong stomach for volatility.
The reason they can do this is that they understand the soul of their investment and once you know the difference between signal and noise, it’s very easy to tune out the noise.
Habit 7 – Goal-based investing
This is probably the most important habit of a successful investor that I can recommend as a SEBI Registered Investment Advisor myself.
See, the stock market is uncertain but our goals are not. The market can go up or down but if I have to send my kid to a good college, I have to invest regularly and there is no way around that.
Therefore, successful investors in this day in age follow Goal-Based Investing. What is Goal-based investing?
It means identifying your life goals, children’s education, buying a house or your retirement and systematically saving & investing based on those goals.
It is because each goal requires a different approach. For your kid’s education, you might want to be conservative whereas retirement might require an aggressive approach since we have a longer timeframe.
Bonus Habit – Constant Learners
Warren Buffett was once asked by an interviewer what is your secret of success and he said casually that I read a lot of financial reports.
Of course, not all of us can do what he did but we don’t have to. We just have to get financially educated. Can we not spend a few hours every week educating ourselves about the financial markets, can we not learn how the stock market works, how investing works? Of course, we can and those who do would be ready to reap the benefits of the world of opportunity in investing.
Conclusion
So guys these were the 7 successful habits of highly effective investors and hope you guys learned something from it. We have made a similar interesting video on the 7 habits of highly effective traders. Don’t forget to check it out as well.
Wishing all of you success in your investing journey!
7 Habits of Highly Effective Investors
Introduction
I was a trader for a very long time. Then a friend of mine introduced me to the concept of value investing and goal-based financial planning.
Over the years, I have been studying successful investors and there were a few things I found similar.
So, let’s talk about the 7 habits of highly successful investors.
Habit 1 – Successful investors are Opportunistic and prepared
Whenever we hear of opportunists, we generally term them as negative and no one likes them. If you see an office colleague as opportunistic, the chances are you won’t have a great opinion about him or her because opportunistic people are always trying to take opportunities away from those who deserve them and that they use unfair practices.
However, in the world of investing, being an opportunist is not only desirable but also required because it is not unfair and you are not competing with anyone.
You need to be able to spot the opportunities when they present themselves and jump on them because opportunities can come at any time.
One fine day, Maggi noodles may be found with high levels of toxins and because of that, the stock of one of the biggest FMCG companies around the world becomes available at bargain prices. OR
The CEO of one of the biggest private sector banks can be found engaging in unfair lending practices and the stock of the company can be found at rock bottom prices. Or of course
The world can be dealing with a pandemic of historic proportions and you get the whole market at a fire sale like there is no tomorrow.
Opportunities come to us all the time but just being opportunistic is not enough, you also need to be prepared for that.
Last year, for example, I made a video of a profit of Rs.1 crore. ( https://youtu.be/POJUyh8Th9o) Most of the stocks were good quality stocks and this is the power of being opportunistic & prepared.
So that means you should have the capital and preparedness or willingness to take the decision and invest when the whole bunch of investors are pessimistic.
Habit 2 – Successful investors understand the soul of the investment
Let me ask you a question – why do we buy gold?
Most of us would say we buy it for making money. No, that’s not true, because who has ever sold gold because it came down 20%? Have you ever seen anyone?
But why? I bet even if Gold goes down 50% you will not sell, I can guarantee you that, but why?
If the investment is done for making money and it is losing money, shouldn’t we logically sell?
See, what we need to understand is that every investment has a body and a soul. The body is, of course, what we see from the outside, the price and soul is the real value we see in that investment.
The reason is that we see something else in gold apart from the price. We see emotional security and believe in its ability to hold its value even if the economy is not doing well.
Similarly, when successful investors invest in a stock, they are not investing in that stock, they are investing in the soul of the stock and the soul of a stock is its business.
These are real businesses that are offering products or services that people are willing to pay for. So, if the business is solid, the price will eventually reflect in its stock.
Imagine that immediately after buying a stock of TCS, it starts declining rapidly, but you know that the company is still solid about its fundamentals. According to Warren Buffet, we should buy a stock on the presumption that the stock market will be closed for the next 10 years. What he means is that we should pick a stock based on the company’s strength, buy it and forget it.
That is the kind of understanding and confidence we need to have in our investments and that can only come if we spend that kind of time and effort as these successful investors are known to.
Habit 3 – Diversify intelligently
What is diversification? It means that you are putting your eggs in several baskets and so, instead of just investing in IT stocks, you also invest in Pharma, Banking, Metals, FMCG, etc. because diversification acts as insurance. So, if you put all your money in one stock or sector and something goes wrong, you are doomed.
On the other hand, diversification, just like salt in our food, is only good when it is done at the right level – too little will render the food tasteless and too much will make the food inedible.
In the same way, too little diversification can increase your risk substantially and on the other hand, too much diversification can compromise your long-term returns.
This is important to understand because there are people who don’t know where to find the right balance. Some people are blindly buying hundreds of stocks and mutual funds whereas some have put all their money in just a couple of them.
Successful investors have a simple rule of thumb – The level of diversification should be directly proportional to your knowledge.
If you don’t have any knowledge, diversify very well, buy mutual funds, index funds, stocks from various sectors. However, as your knowledge level starts to go up, your level of understanding about the business of the companies start to go up, you can move slowly from diversification to concentrate on a particular stock or a group of stocks. So, diversify intelligently.
Habit 4 – Right kind of patience
Everybody says “if you want to make money in the long run, you have to be patient in the stock market” and we all have heard this advice.
But tell that to millions of investors whose portfolios are down by 60, 70, 80%. They were all patient. Investors of Yes bank were very patient, yet, what happened to them? Investors of Idea, Punjab National Bank, DHFL, PC Jewellers were very patient and I can give you thousands of examples where patience turned out to be a bad idea. I am sure a lot of you watching this video must have experienced this first hand as well.
What we need to understand is that patience is a virtue only if it is applied in the right place. So, we need to be clear about what to be patient with?
Successful investors are patient with stock prices but impatient with the business.
Let’s break this down. Patience with price means successful investors are patient to see that the stock prices come down to a reasonable valuation before they invest. After the investment, they do not worry too much about the stock fluctuation.
Remember, I talked about the soul of the stock is in the business? This is not what they are patient with, i.e. the investment in the business. They are impatient when the company is not performing as per the expectations of the investor and the market.
There is always noise and there are signals and successful investors develop a knack for differentiating between the two.
Habit 5 –Successful investors ride their winners
Let’s say you have 2 stocks in your portfolio; One is giving a profit of 200% and the other one is giving a loss of 20%. Which of them are you likely to sell first?
I will tell you what most of us would do. They will sell the stock with 200% first and hold the second one. They always sell their profitable ones and hold their loss-making stocks for a bit longer and with a lot of patience.
I will use my example here. Last year, I bought several stocks and 2 of them were Adani Enterprises and RBL bank. Adani went up 400% from my purchase price and RBL is barely 10% up. Which of them do you think I am holding right now?
In contrast, I also bought RBL bank, which I am still holding by the way.
Why? Why exit a good stock and hold on to a non-performing stock? It all boils down to our psychology.
Warren Buffett has been known for holding all these companies for several decades.
Rakesh Jhunjhunwala has been holding the shares of Titan, Lupin, Escorts forever, even though Titan’s share price fell over 50% twice.
What do these guys know that we don’t? Well, they know that when something is working, do not mess with it. Good businesses tend to do better with time and the biggest money is made when we just sit back and let the stock ride along with these businesses.
But we tend to be a little over smart and look at a winner and say that the stock has gone up 200% and let me book my profit now. We also think of entering again when it falls.
Well, the truth is that we never get a chance to enter and so, the next time you are getting the temptation to book your profits, ask yourself- why am I punishing the winners by kicking them out? Shouldn’t I be kicking my losers out?
Habit 6 – Stomach for volatility
Successful investors play the long game and that means the ability to sit through the roller-coaster ride of the stock market. If the market goes up, we become happy and if it goes down, we get scared whereas successful investors are aware of the market gyrations.
Now, most of us are not comfortable with the stock market volatility.
Charlie Munger, Warren Buffett’s partner, acknowledged that both he and Warren Buffett had been pretty average in terms of their success rate but what differentiated them from the rest was the ability to just sit tight and not sell any investment just when the market went down.
Similarly, in India, Rakesh Jhunjhunwala, Radhakishan Damani sit tight and hold on to their investments even if the prices went down. We have also seen in the news stories that in 3 days Jhujhunwala lost 100 crores and we start to wonder. However, they don’t care because they have a strong stomach for volatility.
The reason they can do this is that they understand the soul of their investment and once you know the difference between signal and noise, it’s very easy to tune out the noise.
Habit 7 – Goal-based investing
This is probably the most important habit of a successful investor that I can recommend as a SEBI Registered Investment Advisor myself.
See, the stock market is uncertain but our goals are not. The market can go up or down but if I have to send my kid to a good college, I have to invest regularly and there is no way around that.
Therefore, successful investors in this day in age follow Goal-Based Investing. What is Goal-based investing?
It means identifying your life goals, children’s education, buying a house or your retirement and systematically saving & investing based on those goals.
It is because each goal requires a different approach. For your kid’s education, you might want to be conservative whereas retirement might require an aggressive approach since we have a longer timeframe.
Bonus Habit – Constant Learners
Warren Buffett was once asked by an interviewer what is your secret of success and he said casually that I read a lot of financial reports.
Of course, not all of us can do what he did but we don’t have to. We just have to get financially educated. Can we not spend a few hours every week educating ourselves about the financial markets, can we not learn how the stock market works, how investing works? Of course, we can and those who do would be ready to reap the benefits of the world of opportunity in investing.
Conclusion
So guys these were the 7 successful habits of highly effective investors and hope you guys learned something from it. We have made a similar interesting video on the 7 habits of highly effective traders. Don’t forget to check it out as well.
Wishing all of you success in your investing journey!
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