Raamdeo Agrawal on how to be a successful investor
Raamdeo Agrawal, Director & co-founder, Motilal Oswal Financial Services, shares his thoughts on the mental makeup required to be a successful investor.
1. Informational Framework
Information is power. Reading is essential to develop a trained and prepared mind. It is essential to read business newspapers. To get a global understanding, recommended readings are FT, Business Week, Fortune, Forbes and The Economist. Newspapers and magazines will provide the informational framework.
2. Analytical Framework
Next is the analytical framework i.e. how to think about competition, complexity, etc. This can be gained by reading select books on investment. A few well-chosen investment books provide this conceptual framework. One should also educate oneself by reading books about great ideas and thinkers. Till about 1995 there were limited books available on investments. Today, books are simultaneously released in India along with their world releases; we have newspapers available free of cost on the web.
Every individual is blessed to be better than others within his own circle of competence. For instance, a cement trader will probably know a lot more about the cement and construction industry. Identify your circle of competence and use the informational and analytical framework to see things that no one else can see.
3. Behavioural Framework
Behavioural framework is the mental discipline that one needs to apply to the process of investing. Greed and fear are two of the most important elements of investment behaviour. One needs mental discipline to be content and happy with a good deal and not be greedy for a better one.
Controlling greed is very important. If you have missed an opportunity, let it be. Don’t chase stocks. Money is not to be made from just one single stock. If you find margin of safety in an obscure company, although the market may not think it’s an L&T or Reliance, it’s fine. What is important is to find truly deep margin of safety and go for such companies, rather than have your portfolio decorated with big names.
Fear arises from the unknown. When the market or a stock is crashing, one is often gripped with fear. At these times, your knowledge of the share and its true value will give you the conviction to hold on and possibly invest more. At such times, strong and robust businesses are available with a very high margin of safety. It’s your knowledge of what you are buying or holding that will reduce risk and the consequent fear.
One has to capitalise on the underlying value and more importantly remain invested during bad times. Everyday ‘Mr. Market’ will keep checking your conviction. The questions to be asked are – does the current price surpass the margin of safety? Is the expected value in the next 3-5 years at a significant discount to the current price? Most importantly, you need to understand that what you own is not just a piece of paper whose price will hopefully go up but a piece of business which will grow in value over time.
The chance of wealth creation is higher today than what it was in the past. We are in an era where hyper entrepreneurialism is the order of the day. The Indian economy has grown 10-fold and is likely to double in the next six years from 1 to 2 trillion dollars.
This has enabled an individual starting with nothing to see an explosion of opportunities – both in India and abroad. However, this requires a lot of ground work and strong inclination to pursue and succeed. Having said that, for individuals who lack the time and passion, professional help is must.