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Playing the long game

Playing the long game

TLDR: Long term investing is a mind game, a patience game and is the ultimate game of grit.

The general perception that we have in our heads is that the stock market is complicated. The mega rich who make money in the market, make money because of the following

  • Information asymmetry - They have a large equity research team who can study the market and identify future star performers and regular investors do not have such resources. So they make money because of the information asymmetry that exists between us and them.

  • Tools and technology - The large investors have complex algorithms,  technical analysis tools, screeners that are not available to the regular investors.

  • Inside information - These mega rich investors hob-nob with other mega rich investors, company CEOs and board members and they leverage this network for inside happenings of industries and to some extent into individual companies (borderline insider trading information) to make money

  • Preferential treatment - They have access to products and services from financial sector that is not available to regular investors. Preferential trading rates, special access platforms, structured products, wealth management insights etc.

Some of the above points might even be valid for the mega rich, but most of them are simply not true anymore. Given that we are in the information age, all the information is available to anyone who has a keen interest and nose to sift through the mountains of information to generate leads into good companies and investments.

But then why don’t regular investors make money in the market? The simple reason is patience.

  • Selling too early (Seller’s remorse)- Good strong research has led to identifying a good stock. Stock is bought at a reasonable price, the tide rises the stock rises to twice its purchase price, the investor is happy and sells the stock. The stock rises on and on to become this 10X bagger but the regular investor does not see this 10 fold growth.

  • Market correction - Buys a good mutual fund but then the market corrects by 10%. Instead of adding more the investors stops the SIP, waits for the market to improve. The market falls by another 10%, he/she has jitters about holding the MF. Market falls by another 10%, they sell their existing holding at a loss and exits the market. When the market rises by 20%, followed by another 10% rise, they re-enters the market, losing all the benefit that comes with investing in the bear market.

  • Buying at the top (Buyer’s remorse) - Stays away from the market and considers himself/herself a conservative investor. Market is in a bull run and everyone around him/her and their grandma seem to be invested in the market. Enters the market near its peak, the market rises to its peak. Pats on the back on being such a brilliant investor, buys more at the peak. The market crashes by 30% over the next 6 months. Sells all the holdings at loss and goes back to FDs and Debt, never to return (until the wounds of the current crash have healed and greed takes over again).

  • Action  - Closet gambler, needs the endorphin hit coming from the constant action in the market. Buy and sell, buy more and sell more as each trade gives a hit. The constant need for action never lets him/her to adopt a proper strategy.

The most essential skill for the long term investor who is serious about making money is patience.

  1. Do all the research you need to pick a stock

  2. Write down the fundamental reasons why the stock is a buy

  3. Think a hundred times before you decide to buy

  4. Once you buy the stock ignore the noise in the market

  5. Ignore market corrections, stay with the stock for the long run

  6. Revisit the buy decision only if the fundamental reasons have changed

As the Oracle of Omaha - Warren Buffet once said

“I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years.”

This should be your guiding principle in the stock market.

What are your thoughts? Have you experienced any of these yourself?

Country risk

Country risk

Fund review - ICICI Prudential FMCG fund

Fund review - ICICI Prudential FMCG fund