Who are you really? An 'Investor' or an 'Investrader'
(Jun 11, 2015)
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In this issue:
» The danger of blindly mimicking other successful investors
» Which are the top dividend payers of FY15?
» A round up on markets
» ...and more!
I know an elderly gentleman who is an old hand in the stock markets. And to be fair, has made his fair share of millions investing in stocks. But there's something about his investment strategy that at times bothers me. I have even tried telling this to him. But he simply shrugs it off saying 'Rahul beta, my approach has worked just fine all these years. There's no reason why I should change it when I am earning good money following it.'
And he could well be right. The wealth he's made from stocks acting as proof. But I think he's making the same mistake Warren Buffett calls the mistake of omission. You see, Warren Buffett's track record is legendary. In fact, the investing world is yet to see someone have that kind of a record over such a long term period.
But perhaps Buffett himself would be the first one to admit that had his rational brains not dozed off when he was mulling over certain investments such as Wal-Mart, his track record would have looked much better. And this is the essence of it. A lot of times we feel happy about what we have achieved, often ignoring that something bigger and better must have been possible had we approached something differently.
And I think this is the same mistake that the elderly gentleman was perhaps guilty of. May be, had he not followed his current investment strategy, he would have made far, far more money than what he presently has.
In order to have a clear understanding of this, it is important to know what his investment strategy is. Mind you, when I came to know of his strategy, he was not the only one following it. I think there are many investors out there who follow the exact same strategy. So perhaps there is a lesson in this for them also.
You see, there are investors and then there are traders. However, there are some who I would call Investraders. In other words, these are people that have shades of both, investing as well as trading in their investment process. And I could sense that this gentleman was certainly an Investrader.
His modus operandi was simple. While buying, he looked for fundamentally good stocks trading at attractive valuations. However, when it came to selling, almost every time, he would sell half of his holdings as the stock doubled and then let his winners run. This, he thought is a win-win for him. For not only has he recovered his investment when the stock doubled but whatever extra profits came, were an added bonus.
On the face of it, this strategy does seem to have merit. However, we don't think it's the most optimal one from a long term perspective. You see, for an investor, the rules are simple, buy at a significant discount to intrinsic value and sell when one feels the intrinsic value has reached. Or if the stock has great growth prospects, ignore the near term valuations and keep holding on to it, as long as the fundamentals are intact.
Bringing in an element of trading by selling half of the stock is sub-optimal according to me. For if the stock has reached intrinsic value, one really wouldn't know when to exit from the remaining position. And if the stock is a long term investment, then holding on to 100% of investments does make sense and would certainly give much better returns.
On the other hand, if a person is a skilled trader, then also, holding on to 100% of the position till the time the trend is intact will indeed be more profitable. Besides, he would also want to enter the stock based on trading principles and not based on investing ones as the gentleman was doing.
So, as we just saw, I think it definitely makes sense to keep trading and investment separate. In other words, have different portfolios for trading and investing. And for each, their own individual rules apply.
Trying to mix the two may give what looks like decent returns. But I believe in the long run, these returns will turn out to be quite lower than if the person is sticking to just one strategy. So, the idea is to be an Investor and not an 'Investrader'.
Don't get me wrong. I am not saying that the elderly gentleman's approach is wrong. In fact, in some of our services, we do ask people to book partial profits. But I think doing it in few cases and knowing that you are perhaps moving away slightly from investing in the strict sense of the word is one thing. And basing your entire investment strategy around it entirely another. And it is this latter approach I have my reservations about.
What do you think? Do you think following the strategy of investrading makes sense from a long term perspective or one is better off being just an investor and have a separate, smaller trading account? Let us know your comments or share your views in the Equitymaster Club.
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Whether you are an 'investor' or 'investrader' your focus should be on indentifying companies that consistently pay dividends. If the dividend income is stable and consistent it has potential to influence your total return from the stock.
Up until now it was mostly the PSU companies that bagged the crown of paying huge dividends. And the reason was obvious. Government being the largest stakeholder was directly benefited from liberal dividend pay-outs. However, as seen in today's chart, TCS has overtaken all the PSUs to become the largest dividend payer in FY15.
Highest dividend paying companies of FY15
This is a noteworthy achievement considering the fact that this is for the first time in 2 decades that a private sector company has overtaken a PSU and bagged the top spot. In fact, as seen, amongst the top 5 list, 3 companies are from private sector and 2 are from PSU sector. Thus, it appears that private sector is getting more liberal in its payout policies over time.
As FY15 included a onetime special dividend payment, it would be interesting to see whether TCS will be able to top the list next year or not. But considering that even Coal India and ONGC are facing difficulties as indicated by a fall in profits in FY15 even their future dividend paying capacity is restricted.
Thus, the race to the top for FY16 would be very close indeed. With the earnings profile of IT companies slowly improving amidst better economic environment in the West we wouldn't be surprised if in FY16 as well some company from the IT space tops the list.
Just yesterday I wrote why mimicking any guru may not be the best approach to build your portfolio. While there I emphasized on lack of patience there is another factor that can lead to your undoing if you choose to mimic. It relates to being misguided and falling into a trap.
Let me explain this with the help of a real life example. Just yesterday the price of Surana Solar, a Chennai based company rose 19% in early hours of trade after a disclosure indicated that one renowned investor had bought stake in the company. However, within a matter of few hours the stock cracked sharply after it was known that some rogue trader had used the identity of that renowned investor to misguide the street. And the purchase was not made by the investor himself. The stock is down 20% in today's trade.
Imagine what would have happened to your holdings if you would have chosen to mimic the renowned investor in this case. I would like to repeat today what I said yesterday - Mimicking is dangerous. You cannot make money in markets by simply mirroring skilled investors. Rather you should build your own approach and stick to it. Seeking professional guidance is another option if you feel you are inept.
The Indian stock markets were trading in the red at the time of writing. While the BSE Sensex was down by 252 points, NSE-Nifty was down by 81 points. However, the Asian markets were trading in the green at the time of writing. European stock markets too opened in green today.
"An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return. Operations not meeting these requirements are speculative." - Benjamin Graham
|| Today's investing mantra
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|This edition of The 5 Minute WrapUp is authored by Rahul Shah (Research Analyst) and Jinesh Joshi (Research Analyst).
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