This goes back to 2007, markets are going crazy, everyone is making smart investments and my friend Sonika is opening the doors of this fascinating world to me. She introduced me to the world of yahoo groups and the money control groups.
People with nicknames discussing trades, ideas, concepts and in just killing it. People with 100x returns on stocks
It left me hooked with just one look.
In a weeks time, I had my broking account opened and I went all in. I moved fast, I listened, I copied tried to grasp all.
I thought I was crushing it
Then out of nothing 2008 happened. The rooms were becoming much quieter, hushed. I was getting scared with each loss. And yet there were few of these nicknames which were wholly relaxed and going on as usual. For them, the game never stopped; in fact, they were upping the ante. All of them got supernormal returns over the next 3-4.
Awestruck, I slowly started getting acquainted with them. Over the next few years, I began to notice that all of them had a pattern of playing this game. Understanding this pattern This would eventually help me start reinvesting in 2011, and since then I have compounded money at > 25% CAGR.
The Big Pattern
There was one common and distinct pattern that consistently stood out among many others. No matter the investing style, this pattern stood above all.
That pattern was: Don’t commit big mistakes.
I started to look, deeply on this pattern.
Slowly clarity emerged that there was a process, a method, checklist in this pattern
That process ensured that they made smart investments consistently. It ensured that they were always sane when markets were going crazy.
Below I try to share some of the processes. Think of it as a game with each checkpoint leads to the next one and the only way to progress in-game is to cross each checkpoint in sequence.
Check Point 1: Are you ready to be an investor?
See where you fit in the grid
The effort would mean reading books, reports, charts, journals to learn continuously. Time would expect if you can put in at least put in 1-2 hours daily
Irrespective of your style technical or long term or momentum you need a high combination of above to succeed
If you are not in the top right then, you are not ready to go ahead
Check Point 2: To cross this rubicon answer this question. Is your aim from investment to get maximum gains?
If the answer is yes, you will get hurt. Your Northstar is not maximizing gains but maximizing gains per unit of risk. Joel Greenblatt says “My largest positions are the ones where I don’t think I’m going to lose money.” Any stock can go to zero, but some have a higher probability of hitting that.
These have one or two significant risks live leverage or a single customer. Knowing this requires you to put in both effort and time.
Check Point 3: You are skilled, ergo you make money
Enter Michael Mauboussin, who says skill is not the only reason for success. Most activities that we think are skill-based have luck involved. Think if you can deliberately mess up any activity no matter what happens. If not, then you know there is luck involved. Let’s take a case
You find a crap stock and are ready to lose money deliberately by buying it. A perfect case of skill doing magic
The next day an MNC decides to buy them! What just happened! Luck in play. The smartest guys know about this role of chance because they position themselves for this by always surviving. Any game of chance is all about survival
Check 4: Do you quickly learn from your mistakes?
This is a story about Gary Kasparov, which he told in his book.
He would make a wrong move say pawn to E4 in a situation. Most of us would say this is a quick lesson. In a case like this don’t move the pawn to E4. “What were the mental routines that occurred before I made that decision? Don’t do them again”. This is how Gary Kasparov thinks. Doesn’t try to learn quickly but try to learn correctly.
Smart Investments require you to acknowledge
Check 5: Are you happy being a smart investor?
Are you happy after doing well?
You earn 150000, but someone makes 160000, and you are like damn!!. Money from investments is straightforward but holding that money and being happy about is the real financial plan.
If you don’t, then there is a high chance you would get seduced in doing something which increases your risk.
Do also read basis the above how you should think about planning goals.