A thread. Some of my biggest learnings came in the last two years of my first cycle (9 years of full-time investing):
1) In the beginning, everybody thinks bottom-up stock picking is the holy grail, I thought so too. Whereas, in reality, sectoral tailwinds/headwinds immensely matter and should never be ignored.
2) I always thought technical analysis is all gas and what matters is 'just' the business behind the stock. I was wrong. Price-action, volumes, delivery data, liquidity/flows, index inclusion, etc. also matter & can add value even for fundamental/value investors especially for..
timing & optimizing the entry/exit better. 3) Value stocks without a catalyst are value traps. It's okay to wait for the catalyst and board the train 20-30% higher, but at least it will be a moving train and not a stationary one with an indefinite wait, capital is finite..
and opportunity cost should always be considered. 4) It probably makes sense to have a stop-loss in terms of time, not every management can execute. In fact, even if the past execution track record is great, it could falter in an evolving environment, changing competitive..
dynamics, regulations, etc. If our thesis doesn't play out for 3-4 years, something is wrong and it makes sense to switch but continue tracking. 5) In small & micro caps, entry during a bull market is easy & smooth, however, there is no exit in a bear market as volumes dry up..
or exit has to be at a huge impact cost. This is like Abhimanyu's Chakravyuh. 6) In cyclicals, exit criteria should be defined at the time of entry itself and should be adhered to, no matter how rosy the fundamental performance in the upcycle is. A timely exit is all that matters
Otherwise, you would be back to square one. While exit strategy should be triggered based on some fundamental criteria like a reversion to mean in valuation/profitability margins, however, the actual exit could be on the way down, maybe 10-15% from the top.
7) Certain investing styles are best suited for individual investing & not for managing/advising public money. The role of money manager isn't maximizing returns but optimizing them with respect to risks. Drawdowns should be minimized even at the cost of sacrificing some returns.
Drawdowns that last long enough could be considered permanent loss of capital. 8) If there is froth in a particular segment of the mkt, even if your stocks from that segment are at a reasonable valuation they will still get affected badly when there is a sell-off in that segment.
9) Diversification is crucial no matter how deep your understanding of the business is, coz shit happens. 10) While formal education like CA/CFA/MBA can set the foundation right, there is no substitute for own experience; it is the biggest teacher in the market.
Vicarious learning is also not enough, one has to be invested in the market to go through those emotions. It takes one or two market cycles just to understand own psychology, mass psychology and to determine 'what works for me'.
Some of these learnings got reaffirmed when I read about similar experiences of experienced investors like Hiren Ved and Rajashekhar Iyer, especially in the book Masterclass with super-investors. /End.
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