Mastering the Market: Investing lessons from 2023
7 real world investing lessons in 9 minutes that transformed my portfolio in 2023 & can do the same for you too
Year end holiday season almost always sets up a retrospective mood. Sliding effortlessly in deep thoughts instead of the usual fleeting one’s. And what better time to break the radio silence this newsletter had gone into for last couple of months, while also talking about some of the investing lessons that markets took on himself to teach me, which can also be useful to your investing journey.
Interestingly for the first time in 7 years I am not employed at any SEBI (India’s market regulator) regulated entity. That means my articles will no longer be scrutinized by compliance department to ensure I am not peddling any stock advisory (as I write mostly on Indian markets). While I still don’t intend to turn into a stock tip provider just yet (sorry to disappoint!) I will hopefully be more actionable, pointed, specific, critical in these write-ups beginning from this one.
And finally why should you spend valuable 9 minutes of you life reading this unsolicited investment advise? Because it very expensive to learn only from your own mistakes, more so in investing! So let jump in.
Lesson 1: Between very short & very long term lies the sweet spot in investing, the medium term
The most common & counterproductive practice that I have seen in media on financial markets are that they will continue questioning the trend until it stops trending. Be it upwards or downwards. “NIFTY makes new high, it is time to sell?” “NIFTY makes new low, is market overdoing it?”. And the moment trend stops the question shifts to “Time to buy the dip ?”
It is just plain frustrating for someone trying to make sense of markets. And following such advise almost always leads to entering either too late or too early.
”Trend is your friend” is a common, cliched & overused adage for investors. It is also the toughest to stick to. But, if you can find an objective way to follow it, you will for sure be rewarded. Trend is far more easier to ride in medium term. Shorter your investing time scale is, the more susceptible you are to get kicked out of trends prematurely. On other hand if the time horizon is too long returns get averaged to that of markets, you can never truly beat it!
On 8th Dec, 2022 NIFTY was trading at 18,584. During the same time I had shared my analysis on what I felt was a high probable trajectory for the benchmark (14-18% upside, translating to 21,160 - 21,900). NIFTY as of 12th Jan closed at 21,894. NIFTY has done what it was supposed to in medium term (the low hanging fruit) and for someone following this analysis anything on upside is a bonus from here on.
Analyzing what would NIFTY do 2 years from now 2 years ago would have been more trickier with far less probability of being right.Lesson 2: When a new CEO takes over, take note. Especially if the market hasn’t been interested in that company lately
Sundaram Ramamurthy. Rings any bell? Yes, the new CEO of BSE (Bombay Stock Exchange) who has now been covered very widely in media. But he wasn’t when he first got appointed on 4th Jan, 2023. The stock was down some 50% from it previous high at that point. Nothing much seemed to change immediately after his appointment too. Stock continued its fall (as you can see in the chart).But then things changed. Rocket🚀took off! Was I a market insider? No way😂
The only thing I did was to follow the changes he was making or wanted to make. And most of it was publicly available. It helped that I knew the brokerage business & the drivers of this business. And when I saw changes being made was adding momentum to those drivers I started tracking it more closely. I like to base my entries on technicals and when the cue came on the chart I did not hesitate.The above image shows my entry price (565.48), the exit price (2191) & the returns generated. I held the position for over 8 months. (Why I have exited is a story for another time). There are times when market suddenly jumps up 10-15% when a celebrated CEO joins on the very day of announcement. Although I prefer a more gradual stock move (like in case of BSE) these are also interesting place to nibble into. Letting the initial euphoria die down a bit for couple of days/weeks before purchasing is more prudent approach.
Lesson 3: If any sector is hammered, spread your bets across the entire sector
In my opinion unless you are a professional investor, risk - reward is far more attractive if you can invest at sector level. Because when the sector reverses after correction often a different set of stock tends to outperform from those before the correction. Especially if correction lasted for couple of quarters (and not a knee-jerk reaction to some one time news).
IT Sector hasn’t been a favorite in whole of last year. At index level it was consolidating within ~20% band. At the same time there were some stocks of the same sector which were in altogether a different orbit when the consolidation ended.Let me zoom into the midcap IT space to articulate this better. From the bottom made at the start of 2023, Birla Soft, Cyient delivered ~207%, Zensar Tech & Coforge returned 180% & 100% respectively. These were not exactly the favorite before the entire IT pack was hammered. The more favorite ones before the fall like Tata Elxsi & Happiest Mind gave comparatively a more modest return of 50% & 21% respectively. While KPIT Tech continued being the star before & after correction with a stupendous 250% return. So unless you have team of analyst supporting you in handpicking stock, picking more than one player from beleaguered sector could be more rewarding.
Lesson 4: Any investing strategy won’t outperform all the time, idea is to find one whose drawdown period is consistent with investor’s psychological makeup
Looking at historical data Momentum investing strategy will likely look very attractive because the cumulative return (read this for a deeper dive on factor investing) but it also has the sharpest drawdown. For example, if you started investing in NIFTY200 MOMENTUM 30 somewhere in mid of 2022 alongside investing in NIFTY50, the momentum fund would have been under performing all the way until the last 3-4 months of 2023. But by the time 2023 ended momentum fund not only covered the underperformance but overshoot to become an outperformer.Living through the drawdown extending weeks & months can be emotionally taxing. Unable to bear the pain, many usually chose to jump out to ones that has performed better in the more recent past, ultimately missing out the massive outperformance that accumulates over time.
Lesson 5: You can make money in market by using what you know already
Peter Lynch, has left a lasting impression on my investing approach. In his bestseller “One up on Wall Street” he highlights this very lesson. We are always interested in the shiny object which we don’t own. Doctors are losing sleep on which auto co. will be at the forefront of EV revolution & while automotive engineers researching which pharma giant will come up with the next revolutionary drug.
This is something I learnt the hard way in 2020 markets crash. By then I had already spent some 3-4 years in brokerage industry. Yet I just did not care tracking the sector for purpose of investment. Something I was not keen to repeat in 2023.
Like I had mentioned earlier, every industry just has few handful drivers or key metrics that has enormous impact on the business trajectory (and eventually the stock price). Keeping technical jargons aside, for retail brokerage business in India, it is largely how many new customer you can get for derivatives trading (F&O) and how long they can continue trading on your platform. The better these metrics are better the business performance.Plum net profit margin, consistent top line growth & control on expenditure especially customer acquisition cost made Angel One a low risk - high reward bet.
Lesson 6: Don’t analyze so much that you get paralyzed to take decision on the same analysis
The other extreme of doing no analysis before committing money is over analysis and drowning oneself into it. Sometime the love for analysis grows so much that we become uncomfortable taking a decision when we don’t have all the facts. This makes analysis a rabbit hole. One can never truly have a single conclusion on investment thesis with zero risk. This sets up a vicious spiral where the more you analyze more is the need to analyze further.
Sula Vineyards IPO analysis has been an article that people loved reading as much as I enjoyed writing it. You can check out the article below.In spite of deeply researching an iota of doubt stopped me from applying to the IPO and kept me on the sidelines. The stock since then has gone ahead to return 103%. A missed opportunity!
Lesson 7: No matter how meticulous your research is, its never sure shot in markets
Investing is not a science purely. There is never one correct answer or single conclusion. The inherent uncertainty has to be embraced. Avoid temptation of going “all in” especially if you believe the investment idea is an absolutely no brainer. Because there is never a no brainer. Be confident but know how to handle if market proves you analysis, timing or logic wrong.
Case in point - LIC IPO. Considered significantly undervalued at IPO valuation by many market experts (read more here) with a reasoning which seems near perfect. I had also researched and written about it. And came to the same conclusion.
But, it seems majority of market participants didn’t think so. Or at least that is what the price signifies which has been able to come to the positive territory every since IPO listing.
I hope these 7 investing lessons help you invest better in this year and beyond. If you felt they were actionable, objective & could help someone you know please share it with them. Happy New Year 2024!
Disclaimer: Views presented in this article is personal opinion of author and doesn’t not represent any firm’s view that he is currently associated or might have been associated in the past. The author might have position in the stocks mentioned. No part of it should not be considered as a recommendation to buy or sell any of them. This is an educational article at best. Although care has been taken for correctness of the data, author does not take any responsibility for any errors or omissions. Readers should consult their financial advisers before taking investment decision.