Don't Build Noah's Ark

We have been witnessing a very strong market sentiment that started with the run up to the general elections and then continued with the once-in-thirty-years win of a single majority by any political party in India. With a pro-reform mindset, the BJP government led by Narendra Modi has promised "acche din" to the people.

I have been bullish on the Indian market since last year and believe that this is just the beginning of a bull market in India. And it has a long way to go. I hear a lot of market players talking about steep corrections in the near future. As long as there is such healthy scepticism in the market, there is unlikely to be any major reversal. Also, intermediate corrections are healthy in a bull market and usually gives the opportunity to investors to get into good stocks of their choice.

A bull-market brings with its in-built  challenges for investors. Sell side analysts and brokerages start aggressively pushing their stock recommendations. Investors get such "multibagger ideas" daily in the inbox, whatsapp, facebook and other such groups & forums. Suddenly, "investment experts" come out of the woodwork and start making recommendations and touting up their "fantastic past records". And people get lured by the easy gains in the market and start "collecting" stocks. Their portfolio starts looking like what I call the Noah's Ark - having two of everything!! Stop. Think. And then only buy those companies which as an investor you are comfortable with; those stocks which are within your circle of competence.

And always remember sometimes the existing stocks in your portfolio and are as good (if not better) than the latest hot stock you are pursuing. So, focus on businesses, moderate return expectations (most errors occur when people try to chase incrementally higher returns) and cut out the noise.

Guru Speak: Bruce Berkowitz on WealthTrack

The legendary fund manager of the Fairholme Funds on his contrarion picks. 

Counter-thought - A process

Most of us do not think of how or why our investments can fail. While buying, we either look at the fundamentals or consider technical charts or do a mix of both and then buy. However, we are sometimes fooled as something that we may not have considered in our analysis takes place and our investment goes down in value. For this it is critical to have, what I term, as Counter-thought.

In counter-thought, you do a sort of crystal ball gazing and think that you are one year from now and your investment has turned you a loss. Now looking back you have to point out the reasons why it did not work out as you had planned or hoped it would. Looked at it from this perspective, it is much easier to figure out the major risks that can result in a loss. For example, if you are buying a company based on its ability to rent out its real estate (e.g. Nesco), then one loss-case can be a natural disaster like earthquake/flood/fire which destroys the primary asset. Another one can be a overall slump in industrial and trade fairs and reduction of demand. If you sit down with a pen & paper (notepad on a computer would do just fine as well), then you can chalk out multiple similar scenarios.

Once you have these items in your investment risk list, you can categorize them based on probability of occurrence and its possible impact. Again, taking the same example, a natural calamity at the primary convention center for Nesco is a very remote probability event but with extremely high impact (i.e. its effect is potentially catastrophic for the company).

So, before you put in your money in a stock next time, do spend a bit of time on counter-thought.