Success in stock market lies in not losing investments

Recently, one of my friends asked me to suggest a multi-bagger stock and I asked him to elaborate his requirement. Then, he said that he could invest a large sum now and forget it for a long time and it should translate into a multi-fold return. Then I mentioned stocks like Wipro and Infosys that if one had invested couple of decades back could’ve made returns in exponential times, for which he inquired if there’re stocks like Eicher Motors & Bosch which have multiplied in less than 5 years time.

• Over the past 100 years, only one company featured in the Dow 30, the Dow Jones Industrial Average (DJIA) consistently and it’s General Electric. And nearer home, NIFTY, the 50-stock index, had a churn of over 150 stocks in about two decades. That’s how competitive the businesses are and merciless the expectations are. So, to just identify one stock and invest all only into is not a great move for any investor
• We’re living in the world where the trend of Unicorns (valuation of $1bn and more) and their rise within a short span of less than 5 years is catching up

I gave up reasoning. First one needs to understand that one can’t always end up getting a stock which is a phenomenal winner. While those who invested in the above stocks didn’t restrict their entire money into that, it was an allocation that went right while may be there’re many misses also.

So, when someone thinks to strike gold by identifying one particular stock then probability of the success is nothing but a chance. Over the past 100 years, only one company featured in the Dow 30, the Dow Jones Industrial Average (DJIA) consistently and it’s General Electric. And nearer home, NIFTY, the 50-stock index had a churn of over 150 stocks in about two decades.

That’s how competitive the businesses are and merciless the expectations are. So, to just identify one stock and invest all only into is not a great move for any investor. The Dow’s average age of its constituents is 111 years while that of the Nifty is a mere 46 years while the oldest company is about 121 years old (PNB) that of DJIA is DuPont at 214 years.

Another stark point is the youngest companies of these indices are about 10 years for Nifty and over 30 years for DJIA. The last statistic provides for a critical inference that the competition is heating up and the average age of the businesses is shrinking and also their time to succeed.

We’re witnessing and living in the world where the trend of Unicorns (valuation of $1bn and more) and their rise within a short span of less than 5 years is catching up. So, with this backdrop, how could one make greater returns from stocks? It might interest to bring an analogy of cricket (with the IPL fever alive) to understand the investment.

When we watch some fabulous individual contributions by a player while over the same pitch at the same ground on the same day with the same opponent, their team members fail to capitalize, we wonder how this player had succeeded. We credit him with his technique, style and sense of responsibility but if these are so easily identified and measured then why couldn’t other emulate.

There’re times the spectators, critics and the commentators would simply define this by using adjectives like talented or gifted. But, one common feature of that performance would be of little or no mistakes. How to read that in the investment context? It means that the most rudimentary part of investment is about not making mistakes or avoiding them.

This is critical than making the best of the investment decisions. This is what happens when investors are obsessed with finding the top performers in stocks or mutual funds. This leads to an investor shuffling between the stocks and funds, instead of spending the required time to realize the benefits.

It needs to be accepted that unless one is a genius or chance lucky, that always does end up with such multi baggers. How to avoid the losers even if not making stellar returns? This is possible only by working with a stiff timelines and/or performance range. Simply put, one has to either have a targeted return or time while investing in a stock.

At each point when the stock hits the targeted level, needs to reassess to the holding limit (i.e. to add or shave off) and derive a newer target. In case of a MF, one has to make investments in a systematic or staggered manner with top-ups at any attractive levels while profit booking at advantageous times. This way one could not only make returns but also increase the investment pie.