This article will help you find what to focus on and where not to focus to become a successful investor.
Table of contents
- What gets noticed?
- What goes unnoticed?
- Don’t focus on things you can’t control
- Focus on things you can control
- Focus on reducing the risk
Usually, there are a few things that get noticed by investors.
What gets noticed?
A few of them are listed below:
👉 Franklin India Bluechip Fund will be completing 27 years since its inception. 1 lakh investment at its inception is worth Rs.1 crore today.
👉 HDFC Bank completed 25 years since its IPO in 1995. 1 lakh investment in IPO is worth Rs.8 crores today.
These are the things that get reported and are easily noticed by the investors.
But now let’s see what goes unnoticed.
What goes unnoticed?
What do you think goes unnoticed? Let’s check.
The investor has endured
- Multiple recessions
- Political instability
- Market fall
- Negative news
for about 25 to 27 years. This is what people usually fail to notice. The ups and downs the investors have been through and their patience and persistence throughout these many years.
So what should you do?
Don’t focus on things you can’t control
What are they?
- Foreign policies
- Election results
These things change over time. So focusing on these things doesn’t help.
So what should you focus on?
Focus on things you can control
What are they?
- Asset allocation
Staying a course of 25 to 27 years takes a lot of patience. You have to wait. For this, you need a lot of effort. Consciously you should prepare yourself, you should discuss with your investment advisors and get the comfort of your investments. It takes a lot of maturity from your side.
A lot of people talk about Warren Buffet as a good investor, that he has a lot of logic and a way of doing things. But what gave him wealth? It is not his IQ but his temperament.
What are the other things you should focus on controlling?
Focus on managing the risk not on chasing the return
Don’t focus on chasing returns but rather try to manage risk because this is under your control. Returns are not under your control.
not the management of returns.” –Benjamin Graham
For example: When an investor invests in a mutual fund scheme, he selects it based on rating by media or rating agency. But the facts and reasoning behind it are not checked.
When a rating agency rates a mutual fund, how do they rate it?
They check only the quantitative parameters and give the rating.
How the particular fund is performing?
How the respective index is performing?
How the average category is performing?
These three are fed to an algorithm: fund performance, index performance, and average category performance. Based on these three, they do a lot of statistical analysis, and based on that they give rankings and select schemes.
What is the problem with these rankings?
Choosing mutual funds schemes to invest based on ratings or only quantitative analysis will reduce the risk to one level. There is more scope to reduce risk and increase the margin of safety.
The problem with these rankings is that they are backwards-looking mechanisms. Based on the past data they give rankings and so there is no clue that they will perform in the future as well.
Mutual fund rating companies can change their rating every quarter, as an investor you cant change your investments every quarter. You will want to have it for a couple of years or decades together, you need those kinds of investments.
So what’s the problem with quantitative analysis?
Quantitative analysis should be done but the qualitative analysis should also be done. You shouldn’t stop with quantitative analysis but go beyond quantitative analysis.
Why apply qualitative analysis?
There can be few funds that came to the rating because of mistake or by luck.
For example, there is an average large-cap fund that has performed and has given average returns. Then the fund house hires a fund manager and he gives good returns within 6 months. It is an intense performance and it becomes a good story for all media houses and investors. It gets into the ranking. He gets an offer from another company and so he leaves the company. The fund house will now not be able to repeat the performance. As an investor, you would have invested before or after he went off.
For rating agencies, statistical numbers and quantitative analysis are important, and not whether the fund manager is moving in or moving out. No weightage is given for that, because of that they don’t downgrade the rating. So based on past performance they rate and you go ahead and invest, after that you see less performance. All media were talking about that fund, the rating was also good, you went ahead and invested. Now it’s not performing, no one is talking about that fund. All are talking about a different fund.
In another case, there is an old fund manager. He was managing a fund for a long time. When revamping a portfolio, he chooses 2 stocks by mistake, instead of choosing 2 other stocks but by luck those 2 stocks became multi-baggers and the portfolio gives returns. The media reports about this fund, all of a sudden delivering returns but the fund manager will not be able to repeat the performance. Again this gets ranked. You go invest and you suffer, no one talks about that particular fund after 6 months.
What is the problem here?
When you stop with quantitative analysis, these kinds of funds can also get ranked. So to make it tougher you have to use another filter called qualitative analysis.
There are many of them. One of them is the ability of the mutual fund company to retain the fund manager. An algorithm won’t be able to check this.
1. A mutual fund with an investment process:
In this, the fund manager has to follow the investment process and deliver returns.
2. A mutual fund without an investment process:
Here the fund manager has no restrictions. He can deliver good returns if he is in good form and is capable. If he loses form in some phases of the market, nothing can put him back to the form.
But a mutual fund with an investment process can put him back to the form. He has to follow the investment process, go through the approval mechanisms. Even if he has to leave the company, the new fund manager will be able to easily check this.
On what basis the earlier fund manager has constructed the portfolio?
What are the parameters?
What approval mechanism he has to go through?
When he has to sell the portfolio?
Everything will be clear to the fund manager. That way it’s easier for the fund manager to take over and manage the funds. This gives a lot of cushion to the investors, whether he goes out of form or out of the firm. It is easier for the fund house to manage challenges.
3. Mutual fund companies who claim to have an investment process:
These Mutual fund companies claim to have an investment process and use it during their sales presentation but do not strictly follow it. An algorithm will not be able to differentiate these things.
Hence you should apply both quantitative and qualitative parameters to reduce the risk. Usually, only quantitative parameters are used, but when qualitative parameters are also used as a second filter, it helps reduce the overall risk.
Do not worry or be bothered about what the rest of them are doing as it is not going to help you. Don’t focus on things you can’t control but the things you can control.
Have you started focusing on things that you can control? Have you started focusing on reducing the risk?